What is a unit linked investment plan ulip

What is a ULIP ?

ULIP stands for Unit Linked Insurance Policy. It is a unique product which aims to incorporate insurance as well as investment requirements. Its structure is similar to that of a mutual fund. This is how it works:

• You pay a periodic premium to the insurance company.
• A part of the premium is used to provide you with an insurance cover.
• The remainder amount goes towards purchasing units of a fund, of your choice, being operated by the company.
• In the event of death, nominees are paid the sum assured or the total value of the accumulated fund units, whichever is higher.
• In case of maturity of the policy the total value of the fund units are paid.

Advantages of ULIP

• It is a dual purpose product covering both insurance and investment requirements.
• You don’t have to manage multiple investments.
• Unlike regular insurance policies, you can choose to increase your premium payments for additional benefits in case you have surplus funds.
• ULIP allows you the freedom to choose where your funds will be invested unlike in an endowment policy. You can choose a safe fund which invests mainly in debt instruments, or at the other end of the spectrum you can opt for a high return fund which invests mainly in equities.
• You can switch between different funds offered by the insurance company according to your preference at a particular point of time. For example, if you feel that the equity market may not be a safe option, you can choose to exit an equity-oriented fund and opt for a debt-oriented one.

Disadvantages of ULIP

• ULIPs are more expensive than other insurance products.
• Heavy initial charges towards insurance cover and other administrative charges mean that the amount available for investment is drastically restricted. This may be as low as 35%-40% in the first year.
• A ULIP investment takes longer to break even due to higher initial expenses; hence, it is not an attractive investment in the short term.
• One needs to be well versed in the financial markets to maximise returns from ULIP by switching between funds at appropriate times.