What is ULIP, and how does it work?

When you invest in a ULIP, you will need to pay a fixed premium for your opted cover amount. While a certain portion of your premium is used for providing you insurance coverage, the remaining portion is used for investing in debt or equity investments. To know more about ULIP, why you should opt for a ULIP, and how exactly it works, make sure you read the whole article.

When it comes to making big financial decisions, gravitating towards products that offer more benefits is what we usually tend to do. ULIP stands for Unit-Linked Insurance Plan, and it is a product that is known for packing in multiple benefits in a single investment.

In simple words, ULIPs can act as a double deal in just one investment by providing you with an insurance cover and, at the same time, acting as an investment solution. These plans work as a life cover and will also help you create wealth by investing some portion of the premium in various options like equity and debt investments. By investing in this plan, the investors can get their desired life cover as well as invest for their financial goals. Unit-lined Insurance Plans are known for creating more value for their investors.

How does ULIP work?

When you decide to invest in a ULIP, you will be required to pay a fixed amount (premium) for your selected cover amount. A certain portion of the premium will be used for providing you with insurance coverage, whereas the remaining portion of the premium is used to invest in debt or equity instruments.

You will have the flexibility to choose from the options as per your preference, like debt, equity, and a balanced option for your investment plan. Additionally, you also have the option to switch between different investment instruments during the course of your premium in case you change your mind. There are fund managers who manage the investment according to the fund type. Depending on your investment plan, they will also invest in debt or equity instruments.

It is essential that you keep in mind that, as per the IRDAI, a ULIP lock-in period is five years, and the performance or ability to generate returns in a ULIP is linked to the markets.

Why should you invest in ULIPs?

Insurance- This is one of the primary benefits that ULIPs have to offer. As mentioned above, some portion of the premium is invested in insurance. Hence, you will be offered insurance cover. In case of an unfortunate and untimely death of the investor, the family will have financial support to get back on their feet.

Investment- A certain amount will be invested in equity or debt instruments. The returns will depend on the market. Since ULIPs are long term investment plans, you can also benefit from compounding, earn more income, and generate a significant return.

Tax Benefits – The premium paid towards ULIPs are eligible for tax deduction under Section 80C, according to the Income Tax Act of 1961. Rs 1,50,000 is the maximum allowed deduction under this section.

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