A Guide on The Workings of A ULIP Policy


In the past few years, there has been a boom in the number of investment options available for investors. Today, one can invest in a variety of products, from virtual currencies to digital gold, to earn smart returns. Nevertheless, there are some financial products that remain evergreen for many reasons. One such instrument is the ULIP or Unit Linked Insurance Plan. What is a ULIP policy? This unique product is primarily a life insurance policy that also offers the benefit of investing in equity or debt funds as per one’s needs. Due to this distinct feature, some may be confused as to how it works. We provide a brief guide on the same.

Premium distribution in a ULIP

Like all other life insurance policies, a ULIP requires regular payment of premiums. However, the usage of the premium in a ULIP differs from that of other policies. Along with taking care of the life insurance cover, the premium is also used to invest in different financial instruments. This is the main distinguishing aspect of a ULIP plan. A certain portion of the ULIP premium also goes towards paying several charges, such as maintenance charges and fund redistribution charges, amongst others.

The multiple uses of the premium are a big reason why you may have to pay a larger premium amount when you buy a ULIP online or offline as compared to other products.

Why they are called Unit-Linked Insurance Plans 

As mentioned above, a certain portion of money from the premiums is directed toward investment. However, your money is not directly invested in the market. Instead, it is pooled with the money from other investors and then invested in the market as per each person’s share. Depending on your share of the pooled amount, you are allotted units. The value of your fund, also called the NAV or Net Asset Value, is calculated using the number of units you hold. This is why this product is called Unit-Linked Insurance Plan.

Multiple investment options 

What makes ULIP an appealing investment option as compared to others is that you have a variety of funds to choose from within one product. If you have a low risk-taking capacity, then you can opt for ULIPs that focus on debt funds. Equity ULIPs may be a better option for those who have higher risk tolerance. Hybrid funds are also available for those who have a moderate risk appetite. You can invest 50% of your funds into equity instruments and 50% of your funds into debt instruments. This helps create a balanced portfolio.

A ULIP calculator can help you understand the role that the chosen type of fund can have on the returns. Whether you are planning to buy a ULIP online or offline, remember to use the ULIP calculator and other similar tools before going ahead.

Fund switching 

ULIPs have a very interesting feature known as fund switching. What this feature does is allow you to transfer your funds from one asset class to another. If your equity investments are not performing particularly well due to low market performance, then you can switch them to debt funds. You can also follow the same process for transferring your funds from debt to equity in case you wish to profit from a high market phase.

Some insurers allow for a number of free switches, while others may allow you to make as many switches as you want in a year, completely free.

Withdrawing from your ULIP fund 

ULIPs have a lock-in period of five years, so you will not be able to withdraw any funds during this duration. Once the lock-in period is over, you can make partial withdrawals from your ULIP fund. Note that these withdrawals will not be taxed as a source of income. You should withdraw in such a manner that you still have a considerable amount when you check your ULIP returns in 10 years.

Taxation norms of ULIPs

ULIPs are known for the tax benefits they offer. As per Section 80C of the Income Tax Act, 1961, tax deductions can be claimed against the premium paid for a ULIP policy. Apart from that, the maturity benefit pay-out, death benefit pay-out, and surrender value pay-out are all exempted from taxation. These benefits are valid as long as the required terms and conditions are met. They are also subject to amendments in tax laws.

It is best to consult a financial expert before making any major financial decision. Before you sign your ULIP policy, ensure to have all your doubts cleared and get a thorough understanding of what a ULIP policy is, and the various costs associated with it.