Unit Linked Insurance Plans (ULIPs) are a combination of insurance and investment. Just like insurance, ULIPs provide a cover for risks. In addition to insurance, ULIPs also offer growth in the invested amount, like any other investment.
ULIPs offer higher returns as opposed to traditional insurance. However, ULIPs are a riskier option, because the money you put in ULIPs is invested into the capital markets. Also, ULIPs do not provide a guarantee of fixed returns.
Different types of ULIPs are available in the market, with each type offering different returns based on where the money is invested. Based on their investment profile, the different types of ULIPs are listed below.
Equity funds are ULIPs that invest money into the stock markets. Among ULIPs, equity funds provide the highest potential of returns. At the same time, they are the riskiest alternative.
Fixed interest funds invest money in government or corporate bonds, government securities, and other interest-generating instruments. When compared to equity-based ULIPs, fixed interest funds are a safer choice.
Cash or money market funds invest in cash or bank deposits, or other money market instruments such as T-Bills, commercial papers, etc. These are the safest category of ULIPs.
Balanced funds invest in a combination of equities and fixed interest instruments.
You should note that ULIPs have a lock-in period of 5 years, so you cannot withdraw your investment until that time.
If you want, you can do top-ups in ULIPs. In other words, you can buy more units of the same ULIP if the prices are low, resulting in a lower overall purchase price.
Example 1: Let's say you bought 100 units of LIC Bima Risk Plus Fund at a price of ₹83 per unit for a total investment of ₹8300. Suppose within 2-3 years, the price of this ULIP goes down to ₹60 per unit. You can do a top up and purchase 100 additional units of this ULIP. With the additional purchase, you will have 200 units of the Bima Risk Plus Fund at an average price of ₹71.5.
Any ULIP investment of up to ₹150,000 qualifies for a tax deduction. This amount is deducted directly from the taxable income, resulting in lower taxes. Another advantage of ULIPs is that the withdrawal is also tax-free. Withdrawal of ULIPs could either be due to death of the investor or upon the maturity of the ULIP.
Use our Indian Tax Calculator to see how ULIPs impact your taxable income.