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How ULIPs Work? Explained in Detail

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How ULIPs Work? Explained in Detail
January 16, 2024

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In this policy, the investment risks in the investment portfolio is borne by the policyholder

Unit Linked Insurance Plans popularly referred to as ULIP is a unique financial product that helps you fulfil two goals with one investment. With this, you can grow your wealth with investment in mutual funds while covering the future of your loved ones with life insurance. 

To know how this plan can help your finances in the long run, you must have a clear idea of how ULIP works. If you are hearing about ULIP for the first time, this blog is for you. Keep reading to know everything about this plan. 

How Does ULIP Work?

Unit Linked Insurance Plan or ULIP is a special financial product that provides life insurance coverage and investment exposure in equity funds. 

If you are wondering how ULIP works, the answer is quite simple. Interested policyholders pay the required premium to start investment in Unit Linked Insurance Plan. You can pay this amount as a lump sum or in instalments periodically and choose this from monthly, quarterly, semi-annual or annual payments. 

Following this, your premium is divided into two parts. One of which gets invested in a equity fund of your choice. As policyholders, you can choose between equity, debt or hybrid funds to go ahead with this investment. 

These funds are handled by professional fund managers who take your investment goal and risk appetite into account while investing the amount in equity funds. They will monitor the performance of these funds closely and offer tips for changes in investment patterns for better returns. 

The second part of your premium is invested towards a life insurance plan that provides you with a life cover. With ULIP, you can secure your future with life insurance that can help you fulfil plans like children's education, weddings, your medication etc. while your premium earns returns. 

The longer you stay invested in ULIP, the better your chances become to earn higher returns to cover your future with its twin life insurance benefit. ULIP investment also helps to inculcate the habit of saving for the future at a very early age. Thus, this plan is fruitful for people with long-term investment goals. 

What Are the Features of ULIP Plans?

Now that you know how does a ULIP plan work, let's take you through some noteworthy features of this type of plan. 

  • Regular Premium Payment

    As a policyholder, you can pay the already-determined premium periodically at intervals of your choice. You can select from annual, semi-annual or monthly payment methods while purchasing a plan. 

  • Fund Switch

    In case of a shift in current market trends, you can connect with your fund manager and opt for a fund switch to keep earning stable returns. By doing so, you can avoid instances of major losses in case of sudden market movements.  

  • Choice of Allocation

    This is one of the major aspects that makes up how ULIP works. When investing in a ULIP plan, you can choose the type of fund for your portfolio. You are given a choice of debt, equity or hybrid equity funds; you can choose one keeping in mind your investment goal and risk appetite. 

  • Taxation Benefits

    As per Section 80C# of the Income Tax Act, you can opt for tax deductions for premium payments up to Rs.1.5 lakhs towards a ULIP plan. Furthermore, the amount which you will receive at the end of your investment tenure is also tax-free as per Section 10(10D)# of the Income Tax Act. 

  • Partial Withdrawal

    In case of any emergency, you can opt for partial withdrawal of your funds towards this plan. However, this feature is only available after you remain invested over a 5-year long lock-in period. Also, how many times you can opt for withdrawal and how much is decided by the plan you have chosen. 

  • Top-ups

    With time, you might need to increase your investment premium towards ULIP. Therefore, many ULIP offers a feature to allows you to invest an additional amount towards your plan. This amount can be more than your regular premium and contribute to your investment or insurance coverage. 

  • Number of Years to Pay Premium

    The number of years you need to pay premium depends on your policy term which is usually the same for regular premiums. Nevertheless, some ULIP plans allow investors to change the number of years to pay premiums at their convenience. 

To conclude, the Unit Linked Investment Plan is a twin-benefit plan that allows you to grow capital and keep life insurance cover for your family. As you already know how ULIP works, consider comparing different ULIP plans regarding their features and additional charges. This will help you make an informed decision on which plan suits your needs. 

FAQs about How Does Unit-Linked Plan Work?

Q. What is the return of ULIP in 10 years?

Market experts suggest that while ULIP (Unit Linked Insurance Plans) investments have the potential for high returns over a long-term period, like 10 years, the actual returns can vary anywhere between 10 – 12% or more depending on several factors such as market performance, fund choices, policy charges & Various other factors.

Q. How does ULIP work?

Once you pay your premium in a ULIP plan, it divides your premium into two parts. One part acts as your life insurance cover while the other part is invested in a equity fund of your choice. 

Q. Is there a partial withdrawal possible with ULIP plans?

Yes, a ULIP plan allows partial withdrawal after the lock-in period of 5 years. However, the frequency and maximum withdrawal amount depends on the plan you choose. 

Q. What are the useful features of the ULIP plan?

Some of the useful features of ULIP are flexibility in investment allocation, tax benefits, partial withdrawal, top-up facility and choice of number of years to pay premium. 

Q. Are ULIP plans worth buying?

If you are willing to grow your capital with equity fund investment while saving for life cover, ULIP is fit for you. It will help fulfil your long-term investment goal while inculcating a habit of saving for old age.

ARN - MC/01/24/7454

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Disclaimer

#The above tax benefits are subject to conditions specified u/s 80C and u/s 10(10D) of the Income tax Act, 1961.

The afore stated views are based on the current Income-tax law. Tax Laws are also subject to change from time to time. The customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

For more details on risk factors, associated terms and conditions and exclusions please read sales brochure carefully before concluding a sale. Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

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