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A Unit Linked Insurance Plan (ULIP) combines two things in single unit product. It offers life insurance, and it invests your capital. This two-fold purpose is useful in ensuring the safety of your family and building savings towards big objectives like a new house or a comfortable retirement. A portion of your premium will guarantee you life insurance, and the rest will be invested in equity or debt funds that are controlled by the investor.
A Unit Linked Insurance Plan, also referred to as ULIP, is a combination of life insurance and investment in one scheme. You get both benefits at once. It protects your family with an insurance payout while your money has the chance to grow in the market. A ULIP is more than a cushion of safety, but a wealth-building tool. When you put money into a ULIP, it splits. Part of it pays for the life insurance, and the rest is put into investment funds that you pick out yourself. You can direct your money into:
The power of a ULIP lies in this choice. You get to create an investment strategy that suits you and your goals. Additionally, ULIPs are accompanied by tax incentives according to the Income Tax Act on your premiums and payout.
A ULIP builds a disciplined habit of investing. It grows your money over time while always keeping that essential life insurance protection in place. After understanding what is ULIP plan, let us see how ULIP works. It is a combination of protection and investment that occurs through a blend of the following systematic steps:
1. You Pay Your Premium: This is what you are contributing to the plan. You determine with which frequency to pay, whether on a monthly basis, quarterly basis, annually, or on a lump sum basis.
2. Your Premium is Allocated: The insurer does not put all your money in one place. A small portion covers the cost of your life insurance. The majority of your payment gets invested to grow.
3. You Choose Your Investment Funds: This is where you have control. The insurer offers different funds: equity for higher growth potential, debt for stability, or balanced funds for a mix. You pick the ones that match your goals.
4. Your Money Buys Fund ‘Units’: The investment part of your premium is used to buy units in your selected funds. The price of these units is the Net Asset Value (NAV). As the market moves, the ULIP NAV changes, and so does the value of your investment.
5. You Can Adjust Your Strategy: ULIPs are not rigid. You can move your money from one fund to another. This is called switching. It helps you react to market shifts or secure your profits.
6. The Payout: At the end of the policy term, you receive the fund value, which is the total worth of your investments. Should the policyholder pass away during the term, your nominee receives a death benefit. This amount is the greater of the sum assured or your current fund value.
7. Understanding the Charges: All managed plans have costs. ULIPs have fees for fund management, administration, and the life insurance cover itself. These charges are usually deducted straight from your fund by canceling a small number of units.
Unit linked insurance plans are built with features that give you control, security, and growth. These are the tools that make a ULIP a smart choice for many people looking to build their financial future. Below, we explore some key aspects that will help you understand better how ULIP works and why it is a popular choice for investors.
Some ULIP plans let you look into both your current and future investments by allowing you to transfer assets from one fund type to another in a structured manner, depending on the type of risk appetite you have. They also enable you to effectively manage your assets in order to maximize the returns on your investment.
you can convert your current investment from one plan type to another using Unit Linked Insurance Plans. This switching system enables you to shift all of your funds according to your market view and life stage.
ULIPs also allow you to access a portion of your funds at the end of the ULIP lock-in period so that you have an emergency fund or a first-aid fund for emergencies or planned expenses. The availability of funds implies that you do not need to compromise on the growth of your investment plans.
Additional contributions help you maximize your returns and exploit favorable market conditions. It is an excellent option for those looking to boost their fund value beyond the regular premium contributions of the insurance plan
Premium payments you make towards ULIP renewal or new policies are eligible for tax deductions, and the returns from the policy may also be exempt under certain conditions.
ULIPs provide flexible premium payments, which leave it to you to decide if you want to make payments monthly, half-yearly, annually, or one-time in a way that suits your financial planning. This flexibility ensures that your policy remains active and at the same time does not strain your budget. Also, renewing the ULIP is easy, and one can have continuous coverage and keep on accumulating investment.
To get the most out of your ULIP, you must be strategic. A hands-on approach is the only way to make sure the plan serves your financial goals. Follow these key strategies.
The primary driver of your returns is the way your investments are distributed across the variety of options available in equity and debt funds. You should periodically review this distribution and their corresponding performance. Furthermore, you should consider diversifying your portfolio because it can help mitigate risk and lead to higher potential returns.
For long-term objectives like retirement planning or funding a child’s higher education, allocating a larger portion to equity-oriented funds can be beneficial, as they have a higher potential for growth over time. Conversely, as you near a short-term goal, you should consider switching to more stable debt funds to preserve your capital.
Your risk appetite can change with your age, income, and life circumstances. Since ULIPs provide the flexibility to choose between various fund options, it is important to regularly assess your risk profile. Ensure that your investment portfolio remains aligned with your comfort level, and rebalance it if necessary.
Staying informed about market trends and the performance of your chosen funds is key to making smart decisions. You should actively monitor your investments and use the fund-switching feature strategically. This allows you to capitalize on market opportunities by moving to better-performing funds or to protect your accumulated wealth by shifting to safer options during periods of high volatility.
The foundation of any successful insurance or investment plan is consistency. Paying your premiums on time and in full is non-negotiable. It ensures that your life cover remains active and your investments continue to grow without interruption through the power of compounding. Failing to do so can lead to a policy lapse, resulting in a loss of all the benefits your ULIP is designed to provide.
Unit Linked Insurance Plans (ULIPs) offer a unique blend of life insurance and investment, making them an attractive choice for individuals aiming to secure their family’s future while building wealth. With various benefits of ULIP like fund switching, partial withdrawals, and tax benefits, ULIPs provide flexibility and growth potential to meet diverse financial goals.
After understanding how ULIP works, explore your options today and choose a ULIP that aligns with your long-term aspirations and investment preferences.
1
A unit linked insurance plan is one product with two functions: life insurance and an investment. If you are wondering how does ULIP work, you should know that a part of your premium pays for insurance cover, and the rest is invested in market funds you choose to grow your wealth.
2
ULIPs blend insurance and investment by using a portion of the premium for life insurance coverage, ensuring financial security for the policyholder’s family, while the remaining amount is invested in market-linked funds for wealth creation. Understanding how ULIP plan works and its dual approach helps achieve financial goals and provides a safety net.
3
The main components of a ULIP plan include premium allocation, fund options (equity, debt, or balanced), Net Asset Value (NAV) for tracking fund performance, and benefits like partial withdrawals and fund switching. The plan also offers tax benefits under Section 80C.
4
Premiums in a ULIP are divided into two parts: one portion is used for life insurance coverage, and the other is allocated to chosen investment funds. The allocation depends on the policyholder’s preferences and fund management strategies.
5
ULIPs offer flexibility in fund selection, allowing policyholders to invest in equity, debt, or hybrid funds based on their risk tolerance and financial goals. Additionally, fund switches during the policy term help adapt to changing market conditions. It is extremely important to understand how does ULIP plan work to maximise your investment returns.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Features
Ref. No. KLI/23-24/E-BB/1052
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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