What is ULIP Plan and How Does it Work?

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To get life insurance and the capital growth benefits simultaneously, you can get a Unit Linked Insurance Plan (ULIP). With this plan, you can build a corpus for the future and beat the growing inflation. It can also help you secure your family’s financial prospects in case of your unfortunate demise.

Let’s know How Does ULIP works and how it helps policyholders to earn money and get insurance coverage.

It is a kind of financial instrument that lets you invest in equity or bond and get life insurance coverage at the same time. Under this plan, your insurance company uses a part of your premium towards the life insurance component. Then, it allocates the rest of your premium towards investment vehicles.

At the end of the maturity period, you will get returns depending on how your investment instruments perform. In case of death of a policy holder within the term of ULIP, the insurance company will provide their nominee the death benefit.

Also Read: What is Nav in ULIP? 

Here is a summary of how ULIP works:

• In these financial contracts, you will have to first choose a ULIP product based on the premium amount, life cover and other terms.
• You will have to pay your premiums as per your chosen frequency of payment. In this regard, you need to know that your insurance company will deduct certain charges like fund management costs, administration fees, mortality charges and partial withdrawal fees from your ULIP, as per their applicability.
• The insurance company will put a predetermined portion of the premium towards your life cover and use the rest to invest in your preferred instrument.
• Your investment will keep on accruing returns till the maturity period.
• Upon completion of your maturity period, you will get the aggregate value of your investment.
• In case of your premature demise, the nominee will get the highest of the following options:
  • The accumulated value of the fund
  • Sum assured
  • 105% of the total paid premiums

Now that you know how does ULIP works, you should also be aware of how you can purchase the financial instrument:

Here is a step-by-step guide to invest in ULIP:

Step 1: Do thorough research on the available ULIPs. Compare different products according to their features like partial withdrawal, top-up, and fund switch facilities.

Step 2: Choose a product that has attractive features and terms and conditions and meets your insurance and investment objectives. 

Step 3: Contact the insurance company providing your chosen ULIP product. You can get in touch online or by visiting its local office.

Step 4: Purchase the financial instrument.

Read More: How to Choose the best ULIP Plan?

Here are some of the basic features that make ULIP one of the advantageous insurance policies:

• Flexibility to Select Investment Allocation: You can choose the kind of funds in which you would like to stay invested so that it stays aligned with your risk appetite. If you are a conservative investor, you can choose a plan that allocates your money to debt funds. 

  If your risk-taking capacity is higher, you can go with a ULIP plan that invests majorly in equity. There are also balanced ULIP policies that diversify its portfolio with investment in both fixed-income instruments and stocks at the same time. 

  Also Read: How to Track the Performance of ULIP?

• The Facility of Partial Withdrawal: If you are wondering how does ULIP works as a substitute for your regular savings, you must take into account its partial withdrawal facility. After the minimum lock-in period of 5 years, you can liquidate up to a certain percentage of your accumulated fund. However, the number of partial withdrawals and their maximum amount depend on the terms of your policy.

  Also Read: How to Calculate Returns from ULIP Plan?

• Option for Fund Switching: In ULIP, you get the option to switch your fund type in the middle of the policy tenure. It will especially help you dodge the risk of stock market fluctuation. For example, if your ULIP is equity-based and you see that a bearish market is approaching, you can change your type of fund from equity to debt so that you do not incur losses. Then, when a bullish market returns, you can change your fund type again to increase your earning opportunities.

  Also Read: What is the Minimum Lock-In Period for ULIP?

• Facility of Top-Ups: Insurance companies also allow you to increase your investment through top-ups. For this, you will have to pay the additional amount on top of your premium of the base policy. However, the additional premium amount in this facility will not increase your sum assured value. Instead, it will go towards your investment and increase your fund's value.

• Multiple Payment Options to Choose From: The insurance policy comes with the feature of multiple premium payment options. You can pay it annually, monthly, half-yearly, etc., at your convenience. Some insurance companies also let you choose a single-time premium option in which you can avoid regular payments. ULIP lets you both grow your money and avail a life cover at the same time. Thus, it lets you build a fund for your future. 

Moreover, you can also liquidate your investments like mutual funds after a lock-in period, and tackle your financial emergencies. Now that you understand how ULIP works and all its features, you can avail of one such policy to ensure financial security for you and your family.