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unit linked insurance plan

Almost everyone has at least one of the two ends in mind when they invest money: retirement or taking care of family. While it may appear that you have to address those priorities separately, a ULIP allows you to prepare for both with one financial vehicle. A ULIP is a combination of investment and life insurance used to make various payouts to your beneficiaries after you die. To properly prepare your estate and set it up to benefit your family the most, consider working with a financial advisor who has the experience to help guide the whole process.

What Is a Unit Linked Insurance Plan (ULIP)?

A unit linked insurance plan (ULIP) is a financial product consisting of two components: life insurance and investments. ULIPs allow policyholders to ensure that their loved ones will receive a payout upon the policyholder’s passing. Plus, the investment facet of a ULIP allows policyholders to allocate funds toward assets according to their risk tolerance.

Part of the premium you pay goes toward insurance coverage, while the remaining is pooled with investment dollars of other policyholders and invested into a variety of investment products. This can be a tool to build wealth, pay for the educational expenses of your grandchildren, get access to life insurance or other reasons. Most of the time, a ULIP is used to benefit your descendants.

How Unit Linked Insurance Plans (ULIP) Work?

Usually, you can purchase a ULIP by paying a sizable lump sum upfront. Once you acquire a ULIP, you pay annual, quarterly or monthly premiums to keep the policy and grow your investments. The firm managing the ULIP splits up your payment between your insurance policy and investment account.

ULIPs are most suitable for investors looking for the following:

  • A life insurance policy that guarantees a payout to family members and doubles as an investment vehicle.
  • The ability to change investment types and allocations any time they wish, potentially reducing risk or increasing exposure to higher returns.
  • Maximizing opportunity through staying in the stock market for a decade or longer.
  • An investment that can adapt to different phases of life as the policyholder ages.

ULIPs give policyholders multiple avenues for investing in assets. Each option offers a varying level of risk and return. For example, equity funds can be a good option but stocks are among the riskiest assets. However, equities have the highest potential returns to make up for it. Every stock has an assigned Net Asset Value, or NAV, which lets policyholders know the value of specific stocks.

Another option is to allocate dollars into debt funds toward secured and unsecured bonds. They carry less risk and offer lower returns. If you are retiring soon or are uncomfortable losing money on investments in the short term, debt funds might be the right option. You can also combine both of these strategies of investing in both equities and debts, giving you a balance of risk and reward.

Benefits of a Unit Linked Insurance Plan (ULIP)

unit linked insurance plan

ULIPs are flexible financial instruments that fit various financial plans and investment styles. Before deciding if investing in a ULIP is a good choice for your situation, it’s a good idea to understand how they can benefit you. This investment tool offers policyholders several benefits, such as:

  • Life insurance and investing services in one account: The convenience can simplify financial management. Additionally, ULIPs provide the peace of mind of a life insurance policy and the financial growth of a stock portfolio.
  • Customizable cost and range of coverage: A ULIP’s life insurance portion can pay out anywhere from ten to forty times your annual premium value.
  • Switching investment types: ULIPs allow you to invest in equities in the stock market, which offer high risk and high rewards. On the other hand, conservative investors can allocate their money toward debt funds. Most ULIP companies let you switch investment types for free several times a year. This option gives you control of your investments, so you can invest according to your desire for risk.
  • Better liquidity than other investment accounts: ULIPs have a feature known as partial withdrawal, which gives you free access to some of the funds in your account. As a result, your ULIP can help you address planned or unplanned expenses, typically without a withdrawal penalty.
  • Aiming for financial goals: Whether you want to set up a college fund or save for retirement, you can configure your ULIP to fit your financial plan.
  • Tax advantages: Your premium payments are often tax-deductible. Plus, switching investment types incurs no tax penalties and ULIP maturity/death benefits are usually tax-exempt.

Tips for Selecting a Unit Linked Insurance Plan (ULIP)

When selecting a ULIP, there are things that you can be aware of in the process that could help you choose the right plan for you. The most important tips to be aware of when selecting your ULIP plan are varied but first, you should note the primary attributes of the plan, such as:

  • The life cover or payment is disbursed upon the policyholder’s death.
  • How often you can alternate between equities, debts and hybrid funds.
  • How you can increase your investment funds with extra premiums.
  • Partial withdrawal stipulations.

Next, you can match the ULIP structure with your financial plans. Your ULIP should serve your goals, whether you want to create a small business fund or save for a vacation. Regardless of your goal, understanding the fees before making a decision can also make a huge impact. Like any investment account, the company you choose will charge additional fees to manage your ULIP. It’s a good idea to get a grasp of the costs before committing to a plan.

Finally, being aware of all tax implications is important so that you don’t pay unnecessarily. When considering different ULIPs, it’s likely your premium payments are tax-deductible for most plans. That said, it’s recommended to double-check with the insurance company about how their plan will benefit your tax situation.

Is a Unit Linked Insurance Plan Right for You?

unit linked insurance plan

ULIPs can fit numerous life circumstances and investor types and knowing if it’s right for you really comes down to your personal financial situation. There are three reasons that these plans might be a good idea for a large number of people that fall into certain circumstances. Those reasons are:

  1. If you’re planning for retirement: If you’re early in your career, you can set your ULIP investments more aggressively and adjust them as time passes to fit your time horizon. In addition, when your life insurance policy reaches maturity, you’ll have extra funds you can reinvest.
  2. If you’re starting a family: ULIPs offer the dual advantage of a life insurance policy that can financially provide for your family in the event of the policyholder’s death, plus the option to invest for a child’s education.
  3. If you want to control your portfolio: ULIPs allow investors to switch investment types and adjust the risk and reward ratio in their portfolios. However, investors who prefer a set-it-and-forget-it approach may find this option stressful or time-consuming.

While ULIPs are versatile financial tools, they don’t fit everyone. For example, if you want to put money into a passively managed stock index, you may want to look elsewhere. Or, if retirement is just around the corner, you may not have a timeframe that will allow you to take full advantage of a ULIP’s strengths.

The Bottom Line

ULIPs are multifaceted financial instruments that provide policyholders with life insurance coverage, diverse investment options and tax advantages. Since each ULIP offers different features, it’s critical to shop around and understand the details before paying for a plan. As a result, it’s recommended to develop a financial plan and set goals before purchasing a ULIP.

Tips for Investing

  • Having a financial plan can help you choose the ULIP that is right for you. Financial advisors can help you build a plan that helps you reach your financial goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goalsget started now.
  • ULIPs are just one way to get exposure in the stock market. Whether you’re using a ULIP to create a portfolio or are wondering which investment type is right for you, here’s our guide to investing for beginners.

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Ashley Kilroy Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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