Simplifying ULIPs for you

Buying any financial instrument for the first time is an overwhelming decision. Especially those that are long-term and affect your loved ones directly, like life insurance. Life insurance is a type of product that protects the life of the person who purchases it, i.e. the policyholder. Within the tenure of the policy, if something was to happen to the policyholder, the nominee will receive the sum assured. This ensures that, in the policyholder’s absence, their family does not suffer any financial turmoil.

There are many types of life insurance one can choose from these days. It can be difficult to decide which one to buy, and hence, it is important that you evaluate your needs before making a purchase. These days, most people want more than a life cover from life insurance. Since everyone is planning their long-term investments, they want life insurance that would offer some monetary benefit post maturity too. This has led to the popularity of life insurance types such as a Unit Linked Insurance Plans (ULIP).

What is a ULIP policy?

A ULIP is an investment-linked insurance plan. It comprises both life insurance and investment. In traditional life insurance, the entire premium that a policyholder pays is allotted to providing life cover. While in a ULIP, the premium is partly applied towards life insurance and partly invested in funds. This separates the ULIP from traditional life insurance. It ensures that, along with securing the life of the policyholder, there are returns generated on investments that enable them to achieve their long-term goals. When you are buying a ULIP, you are buying a two-in-one financial product along with the life cover; you also get returns on investments. Since ULIPs are not as simple as life insurance, a policyholder may find it difficult to understand ULIPs. Read further to understand what a ULIP exactly does, along with its features.

How does a ULIP work?

In a nutshell, what a ULIP policy does is that it provides you with insurance along with returns on investments. The insurance component here works simply. In case of your sudden demise within the tenure of the policy, your nominee will receive the sum assured of your ULIP. If the value of the fund is higher than the sum assured, then they will receive the fund value as per the current Net Asset Value (NAV). The NAV of the investment determines its value on a specific date. When you have survived the duration of your policy and your ULIP matures, you will get your investment along with the returns you earned on it. This has enabled ULIPs to achieve the long-term goals of policyholders.

Based on the investment component, there are several types of ULIP available in the market. These are divided based on the risk appetite of the policyholder. When you are buying a ULIP and are planning on taking some risk with investments, equity funds would be ideal. They offer high returns for the high risk involved. If you are looking for comparatively safer investments, there are debt funds available. They are low-risk and offer lower returns when compared to equity. There are also balanced funds available, which are a combination of debt and equity. This type of investment balances risk and rewards.

For long-term investments, it is possible that your financial capabilities strengthen and so does your risk appetite. One of the prominent qualities of a ULIP as an investment is that you can switch your fund allocation anytime you want. From the different types of ULIP you choose, if you choose equity, you can switch to debt or vice versa. This allows you to make the most of market fluctuations. In the long haul, the investment component of a ULIP usually offers good returns, considering the flexibility of fund allocation and the power of compounding.

Who should buy a ULIP?

ULIP is life insurance for individuals who are looking for a life cover along with having an investment in the long run. It provides life cover to the policyholder along with offering returns on investments. Anyone who is looking for life insurance along with investing money on the side for their future goals should consider purchasing a ULIP.