When planning for your family's financial future, you likely look for options that offer financial protection and long-term goal planning. Many people look for a product that can offer both benefits. In such a case, a Unit Linked Insurance Plan, or ULIP, comes out to be an ideal choice. It is an insurance product that offers the combined benefits of life insurance coverage and market-linked investment.
This guide explains what a ULIP is, how it works, and why it might be the right solution for long-term financial planning.
Investing in ULIPs provides both insurance coverage and market-linked benefits. When you pay a premium for a ULIP, it is divided into two parts.
A portion of your premium pays for your life insurance cover. This ensures that, in the event of an unforeseen circumstance (death of the primary breadwinner), your family receives a sum of money known as the death benefit. The remaining part of the premium is allocated to market-linked funds, based on your chosen options. This structure allows you to protect your family's future while accumulating savings over time.
*The investment risk in the investment portfolio is borne by the policyholder.
ULIPs Plan offers a variety of market-linked fund options to match different risk appetites. These typically include:
Equity Funds: These funds invest primarily in stocks and are suitable for investors with a higher risk tolerance seeking long-term growth.
Debt Funds: These funds invest in government securities and corporate bonds. They are lower-risk and offer more stable, though generally lower, market-linked outcomes.
Balanced Funds: These funds offer a mix of both equity and debt, providing a moderate-risk option that balances potential growth with stability.
Professional fund managers allocate funds within your ULIP. Their job is to manage the funds in line with the stated objectives. Many insurers also provide regular updates and online tools, allowing you to track your policy’s fund performance.
*The investment risk in the investment portfolio is borne by the policyholder.
When you allocate premiums to a ULIP, your money is used to buy “units” in the selected funds. A unit represents your share in the fund. The value of each unit is called the Net Asset Value (NAV). The NAV is calculated daily and reflects the market value of the fund's assets. Your total fund value at any time is the number of units you own multiplied by the current NAV per unit. For example, if you own 1,000 units in a fund with a NAV of ₹25, your fund value is ₹25,000.
*Fund values are subject to market performance, and the policyholder bears the investment risk.
ULIPs come with several features that make them a structured option for long-term financial planning.
One of the main advantages of a ULIP is its flexibility. You can switch your allocations between different funds based on your financial goals, risk appetite, or market conditions. For instance, if you prefer a higher-risk profile, you might choose equity funds. As you get closer to your financial goal, you can switch to debt funds to safeguard the corpus you have accumulated.
ULIPs offer tax advantages. The premiums you pay for the life insurance component can be eligible for deductions under Section 80C (only under the old tax regime) of the Income Tax Act, 1961. Additionally, the maturity benefit or death benefit is generally tax-exempt under Section 10(10D).
Note: Tax benefits are subject to changes in tax laws, and you are advised to consult your tax advisor.
ULIPs allow for partial withdrawals after the mandatory five-year lock-in period. This feature provides liquidity, giving you access to funds when required, without surrendering the entire policy.
Note that any partial withdrawal may reduce the total death benefit payable.
Maturity Benefit: If you survive the policy term, you receive the total fund value as a maturity benefit. You can use this amount for long-term goals, such as funding your child’s education or planning for retirement.
Death Benefit: In the event of the policyholder’s death during the policy term, the nominee receives the death benefit, providing a financial safety net for your family.
ULIPs (Unit Linked Insurance Plans) and mutual funds are both market-linked investment products, but they serve different purposes. A ULIP combines life insurance cover with investment, letting you manage protection and wealth-building under one plan. ULIPs may also offer tax-deductible premiums under Section 80C and, subject to conditions, tax-free maturity benefits under Section 10(10D).
Mutual funds, on the other hand, are purely investment-focused and do not provide life insurance. They generally offer greater liquidity, as most open-ended funds allow redemptions at any time (subject to exit loads). Mutual funds also tend to have lower fund management and overall operating costs than ULIPs, which often include multiple policy-related charges.
In a nutshell, ULIPs may suit those seeking combined protection and investment, with long-term discipline and tax benefits. In contrast, mutual funds are typically preferred for transparent costs, ease of access, and flexibility in wealth creation.
Term insurance is a pure protection plan. It offers a high life cover for a low premium but provides no maturity benefit if the life assured survives the term. A ULIP, on the other hand, provides both insurance and a market-linked savings component. A term plan is ideal for securing high coverage at a low cost, while a ULIP is suited for those who also want to build a long-term corpus for future goals.
A ULIP is suited for individuals with long-term financial objectives. The five-year lock-in period and the nature of market-linked allocations mean that the plan needs time to accumulate a meaningful corpus. It can support goals like:
Building a retirement fund
Saving for a child’s higher education or wedding
Accumulating a long-term financial corpus
Your risk appetite is an important consideration. Since ULIPs offer a range of fund options—from high-risk equity to low-risk debt—they can be adapted for different investor profiles.
A Unit Linked Insurance Plan combines the benefits of life insurance and market-linked savings in one plan. With features like fund switching, tax advantages, and partial withdrawals, it provides a structured approach to long-term financial planning while keeping your family financially protected.
If you are looking for a disciplined way to accumulate a corpus over time, a ULIP could complement your financial portfolio. By understanding how it works and aligning it with your goals, you can make an informed decision to secure your family's future.
ALSO READ: