All you need to know about unit-linked insurance plans

Sanjay Mittal

Unit-linked insurance plans (ULIPs) are insurance plans that are linked with stock market benefits. ULIP is a mixture of insurance and investment. The difference between past policies and ULIP is that after deduction of mortality charges towards insurance cover the funds are invested in traditional avenues such as government securities and bonds, bank deposits and other debt instruments resulting in low yield, but in ULIP the money after insurance charges is invested in various equity and debt schemes in proportion percentage as per scheme.

ULIP holders are allotted units of the investment amount and each unit has a net asset value (NAV). The investment made in equity markets is associated with capital market risks and the price of units fluctuates based on the fund performance and capital market movements.

Structure of insurance

Under the ULIP structure, the funds are invested in selected funds as per your choice after deducting allocation and other charges. Various type of charges are deducted from the paid premium like mortality charges, policy administration charges, and allocation charges. These charges vary from scheme to scheme and from 4-10% depending upon the scheme and the company. After deduction of these charges, the remaining funds are invested to buy fund units. The returns will depend on the performance of the chosen funds.

Resident Indians and non-resident Indians can invest in ULIPs. The minimum age to invest is 18 years and maximum age at the time of maturity should be 70 years. Minimum lock-in period for ULIPs is five years and there are no guaranteed returns on the investment made.

Rebate under Section 80C

The amount invested in ULIP is eligible for tax deduction under Section 80C subject to a maximum of Rs 1,50,000 but with the condition that premium should not exceed 10% of the sum assured.

Benefits of ULIPs 

• Ulips help you to make regular savings via systematic plan and also the average cost per unit lowers in regular interval investment as compared to lump sum investment.
• Ulips offer liquidity benefits too as it allow partial withdrawals after five years subject to minimum retention amount
• Ulips are more transparent as compared to traditional plans.
• These are flexible in investment and offer various free fund switchovers to investor with various fund options
• Ulips are ideal for those investors who want the benefit of market-linked growth but do not possess technical knowhow of markets and do not have such time to be active in stock market with the added benefits of risk cover.

The benefits of traditional insurance plans and market-related insurance plans are mentioned below:

Just have a look on the below mentioned real rate of return of various asset classes in the past 36 years (after adjusting inflation of 7.73%)

FD : 0.68%

Gold : 2.52%

Silver : 1.61%

Sensex: 9.20%

The writer is MBA (Finance), CAIIB, PG Wealth Management and Regional Head, ICICI Bank, Bathinda. The views expressed in this article are his own