How ULIP Works

ULIP Works

A Unit Linked Insurance Plan (ULIP) is a special type of investment vehicle that also offers life insurance protection. ULIPs enable you to build money for your long-term goals, including your dream home, your child’s education, your retirement, and more, through systematic investing and market-linked returns. In addition, it uses a life insurance policy to guarantee that your objectives are met even in the event of an unexpected circumstance.

Depending on your risk tolerance, ULIPs offer you the option to invest your money in a variety of equities or debt funds. The returns are tax-free under Section 10(10D) of the Income Tax Act, 1961, even though the premiums you pay are deductible from your taxable income under Section 80C. ULIPs are a triple win since they provide financial security for your family, capital growth, and ULIP tax benefits.

* Currently, there are 2 tax regimes in India – new and old. To get the tax benefit you desire, choose the correct one after consulting an expert. You can opt for a regime change during the next financial year.

Here’s a detailed explanation of how ULIPs function to give you added value and the aforementioned advantages.

How ULIPs Operate

  • You must choose the level of life insurance, premium amount, premium payment method, and policy term to match your goals for financial security and savings before you may participate in the capital market with ULIPs.
  • The choice of an upfront, lump sum payment or recurring payments on an annual, half-yearly, or monthly basis, as well as the frequency of the premium instalments, can be made at your convenience.
  • A portion of your premium is used to provide you with a life insurance policy.
  • According to your selections, the remainder of your premium is invested in the stock market using equity, debt, or hybrid funds.
  • Equity invests your funds in stocks. Debt funds invest your money in bonds, treasury securities, and other safe investment vehicles. With the stability of debt funds and the high return potential of equities, hybrid funds strike a compromise.
  • The value of your coverage is determined by the capital put in these funds. The possibilities of earning bigger returns increase as you invest over a longer period of time.
  • Your nominee will receive the sum assured in the event of an unfortunate event during the policy term to realise their ambitions.

The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.

Unit-linked insurance plan features:

  • Investment allocation: One benefit of ULIPs is the ability to select the types of funds you want to invest in based on your risk tolerance. With equity funds, you can choose to be adventurous; with debt funds, you can choose to be prudent; or with balanced funds, you can have the best of both worlds. Using this feature of ULIPs allows you to direct future premium payments towards the funds of your choice even after placing an investment.
  • Fund switch: You can convert from one fund type to another if you anticipate a shift in the market or if your needs for your investment change. A feature of ULIPs that provides you with the flexibility to change your investment in accordance with your needs is the option to swap between funds. By transferring your investments into debt funds during market downturns and switching back to equities during market upswings, you may protect your investments from market fluctuations. All of this is accessible at any time, at no additional fee, inside the same package.
  • Partial withdrawal: One of the most important aspects of ULIPs is the ability to withdraw money from your plan. After the five-year lock-in period, you can make money from your funds in case of an emergency. The number of withdrawals allowed and the maximum amount of withdrawals are determined by the plan you select.
  • Top-ups: You might want to occasionally boost your investment as your requirements and stage in life change. One benefit of a ULIP policy is the ability to make additional investments above and above your monthly contributions to the plan. By making an additional investment, you may receive more money at the end of the plan’s term.
  • Tax-saving instrument: Under Section 80C of the Income Tax Act of 1961, premiums paid for ULIPs are tax-free up to a total of 1.5 lakh per year. According to Section 10, the sum received at the conclusion of the policy’s term is also tax-free 10D(10D). One of the best aspects of ULIPs is the ULIP tax benefits, which increase the plan’s returns.
  • Multiple methods for paying premiums: This ULIP policy function enables you to pay your premiums whenever it’s convenient for you. You have the option of paying monthly, semi-annually, or yearly.

If you don’t want to make recurring payments, you may alternatively choose the one-time premium payment option. You can use a ULIP calculator to estimate future returns and the value of a ULIP investment.