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.
Types of ULIPs based on the plan structure
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.