Unit Linked Insurance Plans (in short ULIPs) is a combination of insurance and investment. They provide life cover for the insured individual along with the option of investing in qualified investments like stocks, bonds or government securities. Here, the insured individual would be asked to pay the premiums monthly, quarterly, semi-annually or annually. A portion of it would go into securing life insurance and the remaining gets invested into different qualified investments. Investors of ULIPs can usually adjust their fund preferences all through the duration of their investment, thus giving them the advantage of flexibility.

Benefits of Buying ULIPs

• Being an insurance product, in the event of the policyholder’s untimely demise, ULIPs provide life cover to the beneficiary.
• The Long-Term Capital Gains (LTCG) Tax is a tax that the government has recently started levying on long-term investments. ULIPs do not come with the burden of capital gains tax, whether the investment is short term or long.
• ELSS funds (mutual funds) levy fund management charges up to 2.25%, whereas ULIPs cannot charge more than 1.35% as fund management charges.
• There are no fund movement charges when you move funds between debt and equity instruments for a set number of times, unlike ELSS.
• Under ULIPs, you have the option to avail tax deductions under 80(C) or 80(CCC) and claim a maximum tax deduction of up to Rs 1.5 lakhs in a financial year.
• Since ULIPs and ELSS (mutual funds) operate in the same markets and give the customer the choice of instruments, risk exposure, and so on, they are exposed to the exact same risks and make similar gains.
• ULIPs, due to their forced investment nature, are always goal-oriented; for example, you start a ULIP for your child’s education or marriage. Stopping a ULIP attracts heavy penalties and there is even the first 5 years' lock-in period. This type of forced investing under ULIPs ensures you do not take your eyes away from the greater good and keeps you on track. Moreover, one invests in ELSS funds for general-purpose tax-savings and not to meet established financial goals.

Types of Unit Linked Investment Plans (ULIPs)

Here are the various types of Unit Linked Investment Plans:

• ULIP for Retirement: Offered to those who would like to build a corpus for their retirement. It helps you to plan your future by paying premiums while you are employed.
   
• ULIP for Wealth Creation: It helps you to invest and save your hard-earned money to create a good financial corpus (financial backup) for securing your future financial needs or to use it in case of an emergency.
   
• ULIP for Children Education: It helps you build your child’s dreams and future when you are not around. In case of your unfortunate demise, such plans will take care of your child's higher education cost and future expenses.
   
• ULIP for Health Benefits: These policies are aimed at providing financial assistance at times of medical emergencies or hospitalizations. It provides you the option of choosing special riders such as Critical Illness or Personal Accident riders

Types of Funds under ULIP Plans

The different types of funds, nature of the investment in those funds and the risk level is as follows:

Charges under ULIPs

Here are the major charges asked under Unit Linked Insurance Plans:

• Premium Allocation Charges: Charges levied to compensate for the expense incurred towards issuing of the policy which involves distributor fee, medical expenses, and cost of the underwriting of funds.
   
• Policy Administration Charges: Charges aimed at recovering money that goes into maintaining the policy. It involves the cost of paperwork, premium intimation, etc.
   
• Partial Withdrawal Charges: In case the policyholder would like to partially withdrawal some amount for some urgent personal requirement, the cost associated with it will be deducted from the fund value.
   
• Surrender Charges: This charge is deducted only when the insured would like to prematurely cancel the plan and encash the fund value.
   
• Mortality Charges: It is charged on a monthly basis for compensating the insurance company in case the policyholder does not live to the assumed age.
   
• Fund Switching Charges: It is a charge for switching between the fund type.
   
• Discontinuance Charges: When an investor discontinues the plan prematurely within the lock-in period (5yrs), a small fee is charged to the insured for the same. This is preset by the IRDAI and hence common for all policies.