Future Generali

What are Unit Linked Insurance Plans?

Unit Linked Insurance Plans, known commonly as ULIPs, are instruments that combine life insurance and wealth creation in a single product. Investing in ULIPs gives three benefits in total: Firstly, the insurance component of Unit Linked Insurance Plans gives you a protective life cover. Secondly, ULIPs also give investors the advantage of market-linked wealth creation for the investment. And lastly, ULIPs also come with a wide range of tax benefits.

How do ULIPs work?
If you decide to invest in Unit Linked Insurance Plans, you’ll be required to pay a premium. This is almost similar to the payment schemes available for term insurance plans. The difference lies in how the insurer utilises your premium. One portion of the premium you pay goes towards contributing to your protective life cover.

The rest of the premium is invested in various financial assets for the investment period. At the end of the term, when your ULIP attains the maturity age, the corpus accumulated from the invested amount is paid out to you. This is how Unit Linked Insurance Plans help with wealth creation.

What kind of instruments do ULIPs invest in?
Unit Linked Insurance Plans can invest a portion of your premium in a variety of financial assets. Some of these are listed here.

  • Stocks
  • Bonds
  • Equity mutual funds
  • Debt mutual funds
  • Hybrid funds

Typically, insurance companies hire fund managers to handle the exercise of investing your premium in various assets. ULIPs can invest in a combination of the assets mentioned above. As an investor, you have the freedom to choose what kind of investments you wish to add to your portfolio.

If you’re open to taking market-related risks, ULIPs that invest in stocks or equity mutual funds would be the right choice. On the other hand, if you prefer to take a more conservative approach, you could opt for Unit Linked Insurance Plans that invest in bonds and debt mutual funds.

Do ULIPs offer tax benefits?
Yes, Unit Linked Insurance Plans offer tax benefits to the investor.

  • As per section 80C, the premiums paid for investing in a ULIP are deductible from your taxable income up to a limit of ₹ 1.5 lakhs.
  • As per section 10 (10D), the returns obtained upon maturity or the death benefits received in case the insured passes away are exempted from tax.
  • Moreover, ULIPs are also exempted from the Long Term Capital Gains Tax. They are among the few market-linked instruments to continue to remain exempted from LTCG Tax, which gives them an edge in terms of post-tax returns.
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