How Does Unit Linked Insurance Plan Work

 Anumeha Singh
  May 14, 2018

When insurance is not your sole target of investment, a Unit Linked Insurance Plan can provide you the best opportunity to both insure and invest at the same time. ULIP being a market-linked plan its performance and returns are completely dependent upon market.

So, it is discernible that Unit Linked Insurance Plan does not come without risk. But history is evident for its great performance and higher returns.

Working of a Unit Linked Insurance Plan

Here is the step wise functioning principle of a Unit Linked Insurance Plan:

  • ULIP can be considered as the fusion of both insurance and investment instruments.
  • A part of the total amount of money you invest in unit linked plans is used give you life coverage. In terms of coverage a Unit Linked Insurance Plan works just as a typical life cover insurance plan with guaranteed benefits on the demise of the insurance holder. Check out the features of a Unit Linked Insurance Plan as an insurance:
  • ULIPs allow switching between investment funds during the term of the plan. It allows certain number of switching in a given year without charging fees for switching.
  • The premiums contributed towards ULIP are invested to your chosen investment fund only after deducting some regular maintenance charges such as administrative charge, mortality charge, fund allocation and management charges and so on.
  • ULIPs also allow you to partially withdraw the value of the fund at any point after the completion of 5 term years, counted from the inception of the plan. There is certain number of withdrawals that could be availed without paying out any extra cost for it. ULIPs, therefore, provide you fund liquidity with no extra cost at all.
  • ULIPs welcome you to raise your invested value in the form of premium top-ups. You can enjoy larger returns by adding on surplus amount over your existing invested sum.
  • The remaining fraction of the total invested amount is spent on various fund raising devices such as debt, balanced or equity funds. Find out how the fund raising devices work in ULIPs:
  • Debt Fund – this device is suitable for those who are looking for low risk investments. Debt fund mainly invests in traditional bonds and debts where the risk of loss is extremely low and so are the returns.
  • Balance Fund – this device, too, is apt for low risk investors. However, you can earn comparatively more than the debt fund devices. Balanced fund pursue sensible return approach and hence, yielding to modest returns only.
  • Equity fund – this device is the highest yielding device among three of them and also comes with highest risk factors. Equity fund mostly invests in equity markets and pursue a fierce investment approach.
  • The investment here functions just like the functioning principle of mutual fund investments where every insurance holder is free to choose his own fund raising devices, depending upon his risk handling ability.
  • The assets of the insurance holder are managed into several numbers of units. Every single unit has its own Net Asset Value or NAV which in turn is calculated on regular basis. These units are market associated and thus, increases with the raising values of shares.
  • Thus, NAV is the decisive factor of the net return rates of a Unit Linked Insurance Plan.

Various Types of Unit Linked Insurance Plan

Considering the benefits provided on the demise of the insurance holder, ULIPs can be categorized into two major types:

  • ULIP Type 1 – in this type, the beneficiary of the insurance holder receives higher of the assured sum and the value of the fund on the death of the insured.
  • ULIP type 2 – in this type, the beneficiary of the insurance holder receives sum of the assured sum and the value of the fund on the death of the insured.

Tax Privilege in ULIPs

Apart from both insurance and investment opportunity, ULIPs are also eligible for tax deduction under Section 80C of Indian Income Tax Act. You can save up to ₹1lakh and 50 thousand, the entire limit of Sec. 80C, by investing your hard earned money in unit linked insurance policy.

  • The premiums contributed towards ULIP is eligible for tax deduction, hence, it can lower your total taxable income. The premiums of ULIP qualify tax benefit only if the amount to be contributed as premium for ULIP should not exceed 10 percent of the total invested sum of money in the plan.
  • This suggests, if the total invested sum is ₹15lakhs and its premium sums up to be lesser than ₹1lakh and 50 thousand then this entire sum of premium is eligible to receive tax benefit within the premises of Sec. 80C of Indian Income Tax Act.
  • On the top of it, ULIP also offers you a tax free withdrawal opportunity on maturity of the plan, demise of the insurance holder and also while partially withdrawing.
How Does Unit Linked Insurance Plan Work

Anumeha Singh

Hi, i am Anumeha Singh. A Bloger and A Insurance adviser for Life Insurance, Term Insurance, Child Insurance, short term Investments, ULIP, Investment Plans and Tax Saving.

Popular posts

What Do Foxes Eat? Unknown Diet & Habitat

What Do Foxes Eat? Unknown Diet & Habitat

In this article, you will discover what do foxes eat? The foxes belong to the Canidae family. Their appearance resembles the dogs. Moreover, foxes have many similarities wi...

Sep 19, 2019
What Do Bears Eat? Surprising Facts

What Do Bears Eat? Surprising Facts

Today, our topic is what do bears eat? We are going to talk about the eating habit of bears. Bears are giant and strong animals. Normally, male bears are larger than female...

Sep 18, 2019
What Do Mice Eat? Surprising Facts About Mice
Sep 20, 2019
Other posts by Anumeha Singh
Are ULIPs Better Tax Saving Instruments after Union Budget 2018
Aug 30, 2018
Section 80D: Tax Deduction For Medical Insurance and Health checkups
Jan 04, 2018
Merger of 4 General Insurance Companies For Rapid Growth
Dec 06, 2017
5 Best Investment Options to get regular monthly income
Nov 16, 2017
  • Add Comment
    weSRCH App on Apple