ULIP - Unit Linked Insurance Plan

What are Unit Linked Insurance Plans (ULIP)?

Unit Linked Insurance Plans, popularly known as ULIPs, are insurance plans that provide the benefits of an insurance cover as well as a market-linked investment. ULIPs are goal-based financial solutions, linked to the capital market. Thus allowing the flexibility to invest in equity or debt funds, depending on the investor’s risk appetite. ULIPs help with capital appreciation over a long period of time, while providing insurance cover.

Why You Should Invest in ULIP Plans?

1. Higher returns - Investing in ULIPs can provide high returns when you stay invested for 10 years or more.

2. Variety of investment options- ULIPs provide a variety of schemes to the investor. Based on the risk-taking ability, an investor can choose from an aggressive ULIP that primarily invests in equity to conservative ULIPs that invest in the debt market.

3. Flexibility- ULIPs come with the option of switching between different schemes based on the changing scenarios and risk appetite of the investor. The flexibility to switch between a variety of fund options as per the financial situation helps an investor to capitalize on the investment opportunities.

4. Tax benefits - ULIP offer income tax benefits on the premium paid towards the policy under section 80C of the Income Tax Act, 1961.³

5. Liquidity- In case of an emergency or an unfortunate event, ULIP allows you partial withdrawal of the money to meet your funds’ requirement.

How Does A ULIP Plan Work?

The premiums that you pay to purchase and maintain your ULIP is split into two parts. One part is used to provide you with life cover. The rest of the premium amount is invested on your behalf. Our fund managers will help you invest, but the choice of funds is ultimately yours.

Calculating ULIP Returns Using the Power of Compounding

ULIPs help grow your wealth with compound interest. Let’s see how much your money can grow in various scenarios:

As we can see from the table above, ULIPs work best when you stay invested for longer. Funds that offer a higher interest rate can boost your corpus, allowing you to build up a significant amount even if you start with a small contribution amount. From this demonstration, we understand the power of compounding and the role ULIP plays in building long-term wealth.

Which Investor Class is Best Suited for Investments in a ULIP plan?

A ULIP is a good investment opportunity for you if you:

• Have a Varying Risk Appetite
  As an investor, you may not want to take very big risks or play it very safe. ULIPs are ideal for investors who are willing to take some chances. You can opt to invest in a balanced fund that has both equity and debt options. By doing this, you can enjoy high gains from equities while offsetting any losses against steady returns from your debt funds.

• Have a Long-Term Financial Goal
  Unit-Linked Insurance Plans work best when you stay invested for at least seven years or more. Ideally, investors can use ULIPs to save up for the down payment on a home or even to build a corpus for their child’s higher education or future expenses.

• Are a Hands-On Investor
  When you invest in a ULIP, you can choose the fund portfolio. If you’ve opted for balanced funds, you may want to move your allotment to include more equity funds when the market is performing well. Conversely, you may want to increase the debt fund allotment if the market is expected to slow down. You can choose how and when you want to switch your funds to maximise returns.

Types of ULIPs

Types of ULIPs based on the fund type

ULIPs are market-linked. But that does not mean the premium amounts are streamlined towards equity investments only. With ULIPs one can choose other financial instruments to invest in. funds they invest in.

1. Equity ULIPs
In equity ULIPs, part of the payments is used to purchase equity shares, usually of multiple companies. This direct investment in equity makes it significantly more risky than other ULIPs, as the price fluctuations of the shares can directly impact the investment corpus. However, because of the very same reason, the potential for gains is also higher. Hence, equity ULIPs are ideal for investors with a high risk appetite.

2. Debt ULIPs
Investments made in debt ULIPs are directed towards debt instruments. This includes debentures, government bonds, corporate bonds, and fixed income bonds. These instruments pose low to moderate risk, making them a safer option. However, the returns from them are also moderate, and generally lesser than that of equity ULIPs.

3. Balanced funds ULIPs
To balance the risk to reward, some ULIPs offer the option to invest in equity as well as debt instruments. A portion of the fund is allocated to debt instruments with fixed interest rates and the rest is invested in equity. Doing so essentially lowers the overall risk factor of investing in only equity. This stabilizes the fund, resulting in reliable returns.

4. Liquid funds ULIPs
The credit rating for liquid funds ULIPs investments is often high, making them reliable options. It has a low risk factor and is ideal for investors looking for safer options. This type of ULIP invests the money in highly liquid market instruments such as certificates of deposit (CD) and treasury bills. Liquid funds ULIPs also have a short maturity period of only a few weeks to months. Hence, they are great for short-term goals.

5. Cash funds ULIPs
Cash funds ULIPs invest in monetary funds invested in banks. These instruments are exceptionally low-risk. Consequently, the returns they provide are the least amongst all ULIP types. Investors that are very much risk-averse can choose to opt for cash funds ULIPs.

ULIPs can also be classified according to the structure of the payments, payouts and the type of goal they are expected to fund.

1. Regular v/s single premium ULIPs
A regular premium ULIP requires the policyholder to make regular premium payments until the plan attains maturity. The interval of payment is often flexible. A single premium ULIP requires only a one-time premium payment at the time of purchase of policy.

2. Guaranteed v/s non-guaranteed ULIPs
Guaranteed ULIPs are focused on preserving the investor’s wealth while non-guaranteed ULIPs focus on wealth creation. Guaranteed ULIPs tend to provide stable returns over a long time while non-guaranteed ULIPs invest a bigger percentage of the premium into equity markets. Non-guaranteed ULIPs have the potential for higher returns, but come with greater risk.

3. ULIPs focused on different life stages
ULIPs also come as life stage-based plans that invest in both equity and debt, as well as progressively add low-risk debt instruments as the investor ages. For younger investors, the plans often begin with more equity instruments to tap into high returns and build wealth. With time the ULIPs aim for stable returns by lowering risk.

Benefits of ULIP Plans

Unit Linked Insurance Plans offer several benefits to its policyholders. Some of the key benefits provided by ULIP are listed below:

1. Maturity benefits- If a policyholder survives beyond the maturity period of the policy, he/she gets the accumulated fund as the maturity/survival benefit from the insurer. The amount paid as maturity benefits is equal to the fund value. The maturity benefits are exempted from tax under Section 10(10D).³

2. Death benefits- In the case of the unforeseen demise of the policyholder during the tenure of the policy, the death benefits are paid to the family member of the policyholder who is registered as the beneficiary. Tax benefits- The amount paid as a premium for ULIP is eligible for a tax deduction for a maximum of 1.5Lakhs during a year under section 80C of the Income Tax Act, 1961. Moreover, the maturity benefits received are exempted from tax under Section 10(10D) ³.

3. Long-term investment benefits - The longer the investment time horizon in the market, the more you are insulated from the price fluctuations of the market. Investing in the market for the long term gives higher returns and helps you deal with market volatility. ULIP lets you invest in the market for the long term so that you get high returns on your investments.

4. Withdrawal benefits- ULIP allows the partial withdrawal of funds to the investors in case of any emergencies. After a fixed time, investors can withdraw funds up to a certain limit to meet their fund requirements arising because of an emergency. 

Role of ULIP in Wealth Creation

ULIPs help you build wealth systematically over a long period. Let’s look at how a ULIP can help in wealth creation:

• Flexible Investments
  ULIPs enable investors to choose where their funds get invested. Apart from the initial allocation, you can switch funds during the investment to make the most of the market changes.

• Tax Benefits
  ULIPs provide tax benefits on the investment amount. The tax benefits under Section 80C of the Income Tax Act of 1961³ allow you to invest and grow your money while minimising your tax burden.

• Profitability’s
  When you invest in ULIPs, you gain access to multiple asset classes, allowing you to diversify your portfolio quickly. A diverse portfolio allows long-term wealth creation and profitability, making ULIPs a crucial financial tool.

• Lock-In Period
  ULIPs come with a lock-in period of five years, ensuring you grow wealth over a longer time. Long-term investments provide better opportunities for growth and wealth creation.

Features of ULIP Plans

ULIP plans have a list of features that makes them the preferred investment option for the investor. Apart from the several tax benefits and the opportunity to increase your wealth over time, the life cover provided under ULIP plans acts as a safety net for the policyholder. Some of the important features of the ULIP plans are listed below

1. Flexibility- The flexibility of switching between different funds has to be the key feature provided by the ULIP plans. Based on your financial goals, market situation, and risk-taking ability you can switch between different funds to maximize your returns. Apart from the ability to switch, ULIPs provide the additional feature of partial withdrawals. After the lock-in period, an investor can withdraw a certain amount of money to meet their emergency fund requirements. This feature comes to aid when you are faced with unforeseen circumstances and are in dire need of money.

2. Dual benefits- ULIP is a popular choice among investors. What makes it stand apart from the traditional investment avenues is its ability to combine the benefits of insurance and investment. While you are protected by financial security provided under life insurance, you can make high returns by investing in the market. Since the funds are managed by expert fund managers, you are less exposed to the volatility of the market. Moreover, you can decide the kind of investments you wish to make based on how much risk you are willing to take. You can always switch between the funds based on changing scenarios in the market.

3. Financial security- If you are willing to invest for the long term, ULIP makes a good investment choice. The investment time horizon plays a crucial role in getting high returns. Equities perform well over a long period. If you start early, you have the option of investing in aggressive ULIP plans which invest in the equities and with time you can move to the low-risk debt funds. The funds accumulated over the tenure of the policy can provide financial security post-retirement.

How to Choose the Best ULIP Plan?

ULIP is one of the most sought-after investments options for individuals with a long-term financial plan for growing their wealth and ensuring the financial security of their family in case of untimely death. There are several ULIP products available in the market. Here are some key factors to be kept in mind that would help you choose the best ULIP plan as per your financial disposition and risk appetite.

1. Decide your goals- It is crucial to analyse your investment goals before you finalize the ULIP plan you wish to buy. Multiple fund options to choose from allow the investors to research and analyse their investment horizon and insurance goals to zero in on the best plan. Whether to go for equity investing aggressive ULIP plan or a conservative plan that invests in low-risk debt funds depends on the financial goals of the investor.

2. Identify the insurance objectives- ULIP is a long-term investment hence you should identify your insurance objectives and choose the plan that helps fulfill them. To get the maximum from a Unit Linked Insurance Plan you plan to buy, it is imperative to understand different plans. Clarity of investment and insurance objectives plays a vital role in choosing the plan that aligns with your financial goals and provides financial security to the family in case of the policyholder’s untimely death.

3. Understand the features and benefits- Different plans offer different features and benefits. One should be well-versed with the features and benefits offered by the plans available in the market to choose the one that helps meet their financial goals. If you have a clear understanding of the pros and cons of different plans, it becomes easier to choose the one that suits your requirements.

4. Individual Death Claim Settlement Ratio - A crucial factor to consider while choosing a ULIP plan is the claim settlement ratio of the insurance company. The claim settlement ratio denotes the percentage of claims settled by a company out of the total claims received. Insurers with a high percentage are more likely to settle your beneficiary’s claim request, making them more reliable. HDFC Life’s individual death claim settlement ratio was 98.66% in 2021-2022⁹. 

5. Solvency Ratio- The solvency ratio indicates whether an insurance company can honour claims in the future. The higher the ratio, the better. Most companies aim for a solvency ratio of at least 1.5. As per a CRISIL report in May 2022, HDFC Life’s solvency ratio was 1.76 in 2022 ¹⁰. 

How to manage ULIP Funds?

You can opt to manage your ULIP in the following ways:

• Self-Switching
  If you’d like to manage the fund yourself, you can opt for self-switching. You can decide to change your premium allocation based on your investment portfolio, risk appetite and future financial goals. Most ULIP providers allow you to make a number of free switches during each policy year.

• Automatic Switching
  If you aren’t very comfortable managing your investment, you can opt for automatic switching. Here, professional fund managers will make switches based on the parameters you set when you purchase the policy.

• Investment Top-Ups
  Another interesting way to increase your ULIP corpus is a top-up investment. Whenever you have additional savings, you can put more money into your ULIP. Ideally, investors choose this when their ULIP is already performing well and they’d like to take advantage of the situation to maximise their returns.

Steps to Buy ULIP Plan Online

Before you buy a ULIP product you must understand the insurance and investment benefits offered by the product. ULIPs can be easily bought online in a hassle-free manner. Listed below are simple steps to be followed to buy ULIPs online.

• Visit the official website.

• Explore the multiple ULIP products listed on the website and choose the one that aligns with your financial goals.

• Select the tenure of the policy and the premium payment amount that suits you the best.

• Proceed to the payments section.

• Select the mode of payment such as net banking, credit card, debit card, online wallet, etc.

• Make the payment and enjoy the benefits of your Unit Linked Insurance Plan.

Types of ULIP Charges

What are the various charges associated with ULIPs?

The charges associated with purchasing a ULIP are as follows:

1. Premium allocation charge is deducted from the premium amount before investing.

2. Fund management charges are capped at 1.35% by IRDAI, and they are different for every fund.

3. Policy administration charges are payable monthly. The rate can remain fixed or increase at a predetermined rate.

4. Switching charges may apply when a policyholder switches between fund options.

5. Mortality charges compensate the provider if the policyholder's calculated life expectancy is not met. They are levied monthly.

6. Surrender or discontinuation charges are levied for premature encashment of some/all units of the investment.

Why Should I Start Planning My Savings Now?

When it comes to saving and investment, the earlier you start the better. A smart savings plan allows you to put money away for a rainy day while building up a corpus to invest for the future. When you’re young, you have fewer financial liabilities and outgoings, which make it the best time to build up a significant amount. You can then invest your savings in instruments like ULIPs that allow you to grow your wealth for the future. Your savings provide you with peace of mind since you build up an emergency fund and prepare yourself and your families for all future situations.

Click here to view the Specimen Policy Document of this plan.