How Does A ULIP Work?

Unit-Linked Insurance Plans (ULIPs) are both insurance as well as an investment plan. When buying a plan, you would want to get the most benefits from them. The dual nature of ULIPs helps you with exactly that. Not only do you get life cover but you also get a chance to grow your assets by investing them in different types of market funds. 

ULIPs are also famed to be transparent with relatively easy terms and conditions. Nevertheless, it is always helpful to know about how exactly the plan works to gain better insight into where your money is going.

How Does a ULIP Work?

A ULIP divides your money into insurance as well as an investment component. When you purchase a ULIP, first and foremost, you have to pay a premium amount just like all other insurance plans. This amount, then, gets divided into the insurance cover and investment. For the investment purpose, your money is invested in a fund of your choice (you can choose from equity, debt, cash, balanced funds). You can also switch between the type of fund you invest in at different intervals subject to the terms of the ULIP chosen.

You May Also Like to Read:- Is Investing in a ULIP a Good Decision?

Features of ULIPs

The following are some of the essential features of ULIPs.

1. Life Cover

As ULIPs have an insurance component to them, they provide their policyholders with life cover. In case of the demise of the policyholder, the death benefit is paid to the nominees.

2. Fund Options

There are a variety of options available in terms of market-linked funds. These include equity funds, debt funds, cash funds etc. You can also switch your investments between funds as and when you want.

3. Partial Withdrawal

ULIPs are equipped with a partial withdrawal facility. This means that you can withdraw any amount of your fund at any time without risking having to liquidate the entirety of your assets.

4. Loan Facility

An existing ULIP helps greatly when you are applying for loans. You get much lower interest rates and a faster approval. There is also less scrutiny with respect to factors such as CIBIL score.

5. Tax Benefits 

ULIPs are subjected to tax benefits like up to Rs. 1.5 Lakh under section 80C of the Income Tax Act. Moreover, the proceeds from the plan are also exempted from taxation under section 10(10D) of the Act.

Different Payouts Under ULIPs

There are different types of payouts under ULIPs. Take a look at them below:

1. Death Benefit 

ULIPs provide a death benefit to the nominees of the policyholder in case of their death. This is usually a pre-decided amount and is known as the death sum assured.

2. Maturity Benefit 

There is also a maturity benefit payable at the time of maturity of the ULIP. The entire investment corpus is paid out to the assured individual with the accrued bonus and additions, if applicable.

3. Guaranteed Additions 

ULIPs truly flourish when invested in for a long time. If you continue with your plan, the company provides guaranteed additions to your existing funds. This is usually given in the last years of the policy term or at least after the completion of the first 5 years.

Also Read:- Benefits of Purchasing a ULIP

Difference Between ULIPs And Mutual Funds

Endnotes

The working of Unit-Linked Insurance Plans (ULIPs) is fairly simple and easy. Plus, you are promptly informed of all charges involved which makes it easy to keep track of and makes the process transparent and accessible. The above pointers help provide a general view of the working of a ULIP.