Types of ULIP Plans

Table of Content

1. ULIPs Based on Death Benefit

2. Type 1 vs Type 2 ULIP Plan

3. Types of ULIPs Based on Investment Strategy

4. Types of ULIPs Based on Financial Goals

5. Types of ULIPs Based on Premium Payment Options

6. How to Choose the Right Type of ULIP Plan

7. Frequently Asked Questions

Unit Linked Insurance Plans (ULIPs) in India come in a variety of forms to suit the diverse needs of investors. These plans combine life insurance with investment, and their structure can vary based on several factors, including investment goals, fund strategies, payment flexibility, and the way death benefits are paid out. 

Understanding these types helps investors align their ULIP choice with their financial priorities, whether it is wealth creation, child education, or retirement planning.

ULIPs Based on Death Benefit

ULIPs also differ in how the death benefit is structured and paid out to the nominee. This is a crucial classification as it directly affects both the cost of premiums and the extent of financial coverage provided. Most insurers in India offer two main variants: Type 1 ULIPs and Type 2 ULIPs, each with its advantages and limitations.

• Type 1 ULIPs

  These are suitable for individuals who wish to invest with relatively cheap insurance coverage. The insurer takes the risk if the investment performance is not good. Therefore, it is a good option for younger policyholders who prefer life cover to be relatively cheaper while giving their investment a good opportunity to grow.

  - Premiums: Generally lower compared to Type 2, as the insurer's risk is limited.

  - Best suited for: Price-sensitive investors looking for basic life cover along with market-linked returns.

• Type 2 ULIPs

  Such a policy offers higher financial security since the nominee gets both the fund value and the sum assured. While slightly higher premiums are paid, this policy is suitable for breadwinners, as they can make sure their dependents are well taken care of in the event of an untimely death.

  - Premiums: Slightly higher due to the increased payout obligation.

  - Best suited for: Primary earners and those seeking higher security for their families in the event of an untimely demise.

Type 1 vs Type 2 ULIP Plan

The following table shows the different types of ULIP plans: 

Types of ULIPs Based on Investment Strategy

Types of ULIP funds also vary on the investment strategy followed in allocating the premiums invested, where fund options have been designed to meet various risk appetites and financial objectives. Here is a brief overview of four key ULIP types:

1. Equity Funds

Equity ULIPs invest almost entirely in stock markets, providing high long-term annual returns of  12% to 20%. These are appropriate for young working professionals or aggressive investors with long-term investment plans of over 10 years.  

For instance, if you are 30 years old and you invest ₹5,000 every month in an equity ULIP, you may accumulate a corpus of ₹20 to ₹25 lakh in 15 years, depending on market performance.

2. Debt Funds

Debt ULIPs invest in government and company bonds, providing stable returns with minimal risk. They suit conservative investors, retirees, or near-retirement individuals who value security. For instance, if you would like to save your wealth and avoid market risk, debt ULIPs are the best.

3. Balanced Funds

Economically balanced ULIP funds invest in a combination of equity and debt instruments, typically in a 60:40 or flexible proportion. They provide a balanced risk-return profile, which is suitable for new investors in the market or for stable growth with lesser risk than pure equity funds. 

Ravi, a 35-year-old, chooses a balanced ULIP fund with 60% equity and 40% debt for moderate, stable returns. Over 10 years, his investment has grown steadily, even during market fluctuations, as the debt portion helps avoid volatility.

4. Liquidity Funds

Money market or liquidity ULIPs invest in shorter-term instruments such as treasury bills and commercial paper. They carry low risk and are best for short-term investment, or when shifting from one market to another. 

Such funds provide convenient withdrawal, security, and low returns, suitable for capital protection. These investment strategies can be interchanged freely in most types of ULIP plans, enabling investors to adjust their strategy as their stage of life or market situation changes.

Types of ULIPs Based on Financial Goals

ULIPs can be designed to help you achieve different financial objectives at various stages of your life. Whether you need to plan for wealth accumulation, your child's future, retirement, or saving tax, choosing the correct type of ULIP guarantees that your investment and insurance strategy complement each other perfectly.

1. ULIPs for Wealth Creation

For early investors in the 25-35 age group, equity-based ULIPs are the perfect instruments for long-term wealth accumulation. They invest a major portion of the premium in equity markets and provide high returns through compounding and market-linked returns. Moreover, the fund switching facility in ULIPs enables investment rebalancing based on market performance or risk tolerance.

Saving ₹5,000 every month in an equity ULIP for 15 years can potentially create a corpus of ₹20–25 lakhs, depending on how the funds perform. So it is a wise choice for early starters.

2. ULIPs for a Child's Education

ULIPs for child education planning offer disciplined payouts tracking specific education milestones like school, college, or higher education. Most schemes offer a premium waiver facility in the event of a parent's death, and the plan continues.

This provides both financial and emotional security for the child for the future. Indian families intending to secure children's education at an early stage will find these ULIPs particularly beneficial.

3. ULIPs for Retirement Planning

ULIPs can be helpful in creating a retirement corpus with disciplined long-term savings. During working years, investors can begin with equity funds and then shift to debt funds near retirement for capital protection.

A person aged 40 can invest in a ULIP plan to retire at 60, gradually transferring funds to low-risk funds after 55. At maturity, the corpus can be utilised to buy an annuity plan or withdrawn as a lump sum, providing financial freedom after retirement.

4. ULIPs for Tax Saving

ULIPs are useful tax-saving tools because of the deduction offered under Section 80C and tax-free maturity under Section 10(10D)¹. They are particularly popular with year-end tax planning, providing a dual advantage of protection and investment. 

Even compared with ELSS or PPF, ULIPs provide greater customisation, fund switching, and long-term wealth creation with cover, making them a holistic choice for tax-planning investors.

Types of ULIPs Based on Premium Payment Options

ULIP policies provide premium payment flexibility to accommodate varied financial conditions and income levels. Three major types of ULIP payment modes are Regular Pay, Single Pay, and Limited Pay, having different structures, appropriateness, and advantages. Therefore, selecting the appropriate mode makes your policy suitable for your cash flow and long-term objectives.

1. Regular Pay

Under the regular pay option, premium is paid at regular intervals of monthly, quarterly, half-yearly, or annually, during the policy term. This mode of payment suits salaried employees with a regular income, as it supports disciplined investment and enjoys rupee cost averaging. 

Moreover, it supports the habit of long-term savings and is suitable for needs like child education or retirement planning, where regular contributions make a difference in the long run.

2. Single Pay

A single-pay ULIP requires a single premium payment at the policy’s beginning. The coverage runs for the entire term without any periodic payments. It suits NRIs, entrepreneurs, or investors having resources such as bonuses, maturity of fixed deposits, or inheritance. 

Furthermore, it provides ease of payment, tax benefits of Section 80C1 in the year of investment, and convenience of record-keeping. Invest ₹1 lakh in a single-pay ULIP and have life cover and market-linked returns with no future payment commitment.

3. Limited Pay

In a limited pay ULIP, premiums are paid for a few years (5 to 10 years), but the coverage is enjoyed for a longer period (15 to 20 years). This option is best for early planners, professionals with peak earning periods, or individuals with a short-term income window. 

It enables investors to make payments at an early stage and get benefits continuously. A person of 35 pays premiums for 7 years but remains covered under the ULIP until he is 55, providing liquidity and financial independence.

How to Choose the Right Type of ULIP Plan

Selecting an appropriate type of ULIP policy involves a careful consideration of your financial objectives, risk tolerance, and cash flow pattern. Follow these major steps to select the right ULIP Plan for your financial objectives. 

1. Set Your Goal

The primary objective is to specify why you are investing in a ULIP, which can include personal goals like saving for your child's education, retirement, or general long-term wealth generation. All these goals need different approaches:

• Child's Education: Opt for ULIPs that provide goal-based milestones and partial withdrawals.

• Retirement: Opt for plans that provide long-term cover and annuity facilities.

• Wealth Creation: Opt for ULIPs with high exposure in equities for long-term growth.

Clear objectives decide the term of the policy, the type of ULIP fund, and the flexibility required in your ULIP policy.

2. Know Your Risk Profile

You need to know your risk level. ULIPs provide various kinds of funds depending on the exposure to market risks:

• Low Risk (Debt Funds): For cautious investors seeking capital security.

• Moderate Risk (Balanced Funds): A combination of equity and debt.

• High Risk (Equity Funds): For those who want higher returns and can accept market volatility.

Use a simple risk scale:

"If the market falls by 10%, can you remain invested or will you panic-sell?" This will evaluate your comfort level.

3. Pick a Premium Type

ULIPs provide two main payment modes:

• Regular Premium (Monthly/ Yearly): Best for salaried employees with regular income.

• Single Premium: Ideal for having lump sum amounts and suitable for NRIs and businesspersons.

Select according to the availability of cash flow. A monthly pay plan encourages savings discipline, whereas a single pay plan is simple and commits you upfront.

Frequently Asked Questions

1. What are the different types of ULIPs?

ULIPs are categorised based on investment objectives (wealth accumulation, child education, retirement), fund approach (equity, debt, balanced), premium payment (single premium or regular premium), and payout option (Type 1 or Type 2). Each type addresses different financial requirements and risk attitudes. 

2. What are the 5 charges of ULIP?

The five major ULIP charges are Premium Allocation Charge, Policy Administration Charge, Fund Management Charge, Mortality Charge, and Partial Withdrawal/Surrender Charges. These charges pay for a range of administrative, investment, and insurance-related tasks under a ULIP.

3. How many funds are in ULIP?

ULIP plans have a variety of fund options, including equity, debt, balanced, and liquid funds, depending on the insurer. Investors can select or change between funds according to their risk tolerance and market scenario.

4. Which type of ULIP is for long-term wealth creation?

For long-term wealth accumulation, equity-based ULIPs are best as they have better growth potential in the long run. Investors who can take market risks and have a 10+ year time frame generally get the maximum benefits under these plans because of the compounding effect.

5. Can I switch between fund types in a ULIP plan?

Yes, ULIPs provide switching of funds between equity, debt, and balanced funds. This benefit enables the investor to shift their portfolio in line with the market trend or adjusted financial objectives, providing convenience and flexibility of investment strategy.