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What is unit linked insurance plan?

When we talk of Insurance as an investment option, ULIPs have an important role as many of the investor nowadays go for this as a profitable avenue. ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life Insurance policy which provides a mixture of risk cover and investment. The dynamics of the capital/stock market have a direct bearing on the performance of the ULIPs.

Under this policy the insurer allocates the total premium into various units. The insured is also given the opportunity to choose the option of investment units. Most of them prefer to allocate them in financial investments and assets. The number of units they choose on each option differs from individual to individual. Some of them may choose to invest more on properties while the rest prefer to invest more on financial instruments such as shares, debentures, etc.

Likewise the insurer takes care to allocate a unit of the premium for insurance maintenance and the ancillary expenses. The insured will have no choice over this. The insured is also excused from paying income tax for the amount received from the company. However this policy does not guarantee profits like the previous and is therefore risky as far as returns are concerned.

ULIPs fundamentally work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, debentures, corporate bonds and government securities. Investments in ULIPs help to gain tax benefits under Section 80C.

Return on Investment from ULIP are not guaranteed.” In ULIP products/policies, the investment risk in investment portfolio is borne by the policy holder”. Depending upon the performance of the unit linked funds chosen; the policy holder may realize gains or losses on his/her investments. It should also be noted that the past performance of a fund are not necessarily indicative of the future returns of the fund.

Types of Funds do ULIP Offer

The majority of insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund.

The following are some of the universal types of funds available along with an indication of their risk characteristics.

Name of the fund Nature of Investment Risk category
Equity Funds Primarily invested in company stocks with the general aim of capital appreciation Medium to High
Income, Fixed Interest and Bond Funds Primarily invested in company stocks with the general aim of capital appreciation Medium
Cash Funds (Money Market Funds ) Invested in cash, bank deposits and money market instruments Low
Balanced Funds Combining equity investment with fixed interest instruments Medium

Is investment in ULIPs a risky option?

ULIPs are also known as investment plans is an ideal package that comes with insurance coverage and investment options. So that leaves the customer with the opportunity of investing in equities. But they need to keep in mind that the investments in stocks are subject to the fluctuations of the market. The volatility in equity markets can keep the customer anxious and disturbed since they wouldn't like to see their reserve being affected. Customer need to know their risk taking capacity and then make a choice accordingly by choosing an appropriate funds.

As mentioned earlier; ULIPs offer the option to invest in anyone of the four funds. If customers are not tending to take a lot of risk then they can certainly invest in secured or balanced fund. However the best part of having an investment plan is that one can switch from one fund to another, which they find less risky. Two factors considered responsible for the introduction of ULIPs are firstly- the entry of private insurance companies in the insurance sector and the second factor being the decline of guaranteed returns on endowment plans.

Private players proved their innovative ideas with the introduction of ULIPs. The performance of these plans has also been quite impressive. The performance of stock market has made ULIPS all the more popular. It is the only option that lets one to be a part of the stock market and at the same time offers insurance coverage. It is like the better of two things merged into one and honestly things couldn't get any better when we bring its other features into the limelight. An innovative aspect of ULIPs is the 'top-up' facility; a top-up is a one-time additional investment that is paid apart from the predetermined annual premium of the policy. This feature works well when customers have a surplus that they are looking to invest in a market-linked avenue. ULIPs also have the facility that allows the holder to skip premiums if they have paid their premiums regularly for the first three years. For example, if you have paid your premiums dutifully for the first three years then you have missed out the payment of fourth year's premium then the insurance company will make the necessary adjustments from your investment surplus and will ensure that the policy remains active. But it is always advisable to pay the premiums regularly to avoid difficulties. All these facilities are not available with any other policy. This makes it a differentiating factor when compared to policies like traditional endowment, term or money back policies. Another important characteristic is that ULIPs disclose their portfolios regularly. This gives the customer an idea of how the money is being managed. Another important feature is its 'liquidity' factor. Since ULIP investments are NAV (Net Asset Value) -based it is possible to withdraw a portion of the investments before maturity. It is possible only after the completion of the lock-in period, usually it is three years. Such facility is not available with a traditional endowment policy. With ULIPs one can also take advantage of the tax benefits which is offered under Section 80C. It is subject to a maximum limit of Rs 1, 00,000. Investment plans are mainly for those looking for security with an inclination for the share market.

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