Definition of unit-linked insurance plan (ULIP)
What is a Unit Linked Insurance Plan (ULIP)?
A unit-linked insurance plan (ULIP) is a multi-faceted product that provides both insurance coverage and exposure to investments in stocks or bonds. This product obliges policyholders to make regular premium payments. A portion of the premiums is allocated to insurance coverage, while the remaining portion is pooled with the assets of other policyholders and invested in stocks, bonds, or a combination of both.
Key points to remember
- A unit-linked insurance plan is a product that offers a combination of insurance and investment payment.
- ULIP policyholders must make regular premium payments, which cover both insurance coverage and investment.
- ULIPs are frequently used to provide a range of payments to their beneficiaries after their death.
Understanding Unit Linked Insurance Plans (ULIPs)
A unit linked insurance plan can be used for a variety of purposes, including providing life insurance, building wealth, generating retirement income, and paying for the education of children and grandchildren. In many cases, an investor opens a ULIP to provide benefits to his descendants. With ULIP life insurance, beneficiaries would receive payments after the owner’s death.
The investment options of a unit-linked insurance plan are structured much like mutual funds, in that they pool investments with those of other investors. As such, the assets of a ULIP are managed to achieve a specified investment objective. Investors can buy stocks in a single strategy or diversify their investments into multiple market-linked ULIP funds.
Invest in a unit-linked insurance plan
Policyholders must commit to paying an initial lump sum on their first purchase in a ULIP, followed by annual, semi-annual or monthly premium payments. Although the premium payment obligations vary from product to product, in all cases they are proportionately directed towards a designated investment mandate.
Regular premium payments allow policyholders to systematically accumulate capital faster than waiting for returns to accumulate. In addition, many ULIPs offer the option of “reloading” or adding large lump sums to the balance.
Even though ULIPs are in part an insurance product, the emphasis on equity exposure in the investment side of the product may increase the risk to the investor.
ULIPs are unique in that they provide flexibility for investors, who can adjust their fund preferences throughout the life of their investment. For example, they can shuttle between equity funds, bond funds, and diversified funds depending on their investment needs.