Unit Linked Insurance Plan - An Ideal Financial Plan
December 12, 2023

Unit Linked Insurance Plan - An Ideal Financial Plan

Blending the best of investment and insurance, a Unit Linked Insurance Plan acts as a versatile financial instrument. When individuals put their money in a Unit Linked Insurance Plan, a significant portion of the premium paid goes to their life insurance cover, while the rest is allocated to different financial assets, such as stocks, bonds, and lucrative money market instruments.

ULIPs are deemed ideal for long-term financial goals, like sponsoring a child's higher studies or planning for one's retirement. Typically, the life insurance part of ULIP assures that their dependents will have a financially secure future even after the death of the insured. This makes the ULIP an ideal means to mobilize savings to build a retirement corpus and secure one's dependent's financial future. However, before getting a ULIP, individuals must study its features, scope, and limitations to make the most of each aspect in their favour.

Types of Unit Linked Insurance Plans

Unit Linked Insurance Plan can be categorized based on the type of mutual fund linked with them. For instance,

  • Equity Funds: ULIPs invest a part of the contribution to equity-based assets, say company stocks.
  • Debt Funds: ULIPs park a substantial amount of the mutual fund investment in debt-oriented instruments, such as money market instruments, bonds, and government securities.
  • Balanced Funds: ULIPs can also allocate resources in a mix of debt and equity-oriented instruments to help generate steady returns which exposes the portfolio to moderate risks.
  • Whole Life ULIPS: This new gen Unit Linked Insurance Plan extends lower charges and more features than the traditional ULIPs. Some of the most notable features of the whole-life ULIPs are the removal of return on mortality charges when the plan matures and the elimination of charges levied on premiums. 

Features of Unit-Linked Insurance Plans that Make it Lucrative 

These features and benefits of ULIPs make the plan a lucrative option for financial planning -

Flexibility to pick a suitable life cover

Individuals have the flexibility to select a life cover that suits their existing or future financial obligations, ensuring there's adequate protection for their family members. They can later decide to adjust the financial cover based on their evolving needs or improving financial standards. However, the standard is those with a high-risk tolerance cover may opt for a higher cover while those with a moderate or lower risk-taking capacity may pick a lower cover.

Flexibility to pick the best investment type

Individuals have the flexibility to customize their investment portfolio based on their risk appetite and overall financial objectives. They can opt to park their money in options like - equity funds, debt funds, and balanced funds. However, it is always recommended to use the SIP investment calculator to decide which option is best suited for their needs and their requirements and then take a call.

The option to switch between key options

ULIPs offer individuals the flexibility to select and switch between funds, based on their changing risk-taking appetite and financial goals. However, many insurance companies allow them only a limited number of switches in a year for free and may levy a fee for more switches. This makes it crucial to check the fund-switching options and ULIP charges before putting money into it.

Liquidity of the investment 

Unit Linked Insurance Plans extend the flexibility to individuals to make partial withdrawals from the plan without attracting any penalty. This enables them to access all their accumulated investments during an emergency, like additional educational expenses, medical expenses, or other.

Tax benefits

The Indian Income Tax Act allows ULIP holders to claim tax benefits on their annual investment. The act also allows them to claim tax benefits at different stages of the plan. To elaborate, at the entry-level, ULIP holders can claim a tax benefit of up to Rs. 1.5 lakh on the premium paid in a year under Section 80C. Individuals can also make switches from debt to equity in their ULIP investment component without any tax implications. Individuals also have an exit advantage, i.e., they are allowed to claim tax benefits on maturity amount under Section 10(10D). These tax benefits make Unit Linked Insurance Plans quite lucrative for individuals who wish to make the most of their goal-based investment planning.

Tips to Generate Substantial Returns on ULIPs

By following these tips, individuals can make the most of the features of ULIPs and align their investments with their goals.

Tip 1: Start your investments early

Starting Unit Linked Insurance Plans from an early age in one's life offers an individual the ability to allow their savings to accumulate over time to generate substantial returns.

Tip 2: Invest in the plan regularly

Investing in the ULIP regularly can help individuals develop a disciplined approach towards their savings and generate a steady stream of returns to meet their investment and financial safety goals. 

Tip 3: Maximize the benefits of different funds

Individuals have the option to park their money into different investment options based on their risk appetite and goals. This flexibility to choose among debt, equity, or hybrid fund options allows individuals to align their finances with their objectives to generate returns.

Tip 4: Review the investment portfolio 

It is a good practice to review one’s ULIP portfolio to understand which funds are working the best for them and which are not. This allows them to identify the gaps and tweak their goals accordingly.

Tip 5: Find out applicable tax benefits and claim them

Unit Linked Insurance Plans offers several tax benefits under Section 80C and Section 10(10D) of the Indian Income Tax Act. Typically, ULIP holders are allowed to claim a tax deduction of up to Rs. 1.5 lakh on the premium paid in a year towards the ULIP under Section 80C. Additionally, the maturity proceeds are tax free under Section 10(10D). Individuals should find out more about these tax provisions to claim their benefits and save more on ULIP.

ULIPS are a lucrative financial instrument these days that extend the best of investment and insurance to the account holders. However, it is recommended to understand the limitations in detail to plan their ULIP investments better.