What are ULIPs? How do they work? Are they good for long-term investment?

When you think of investing your money, the first thought that you have is investing in conventional instruments like fixed deposits or gold. However, you might want to check out more modern financial tools like ULIPs, which offer better returns and also offer insurance coverage.

A Unit-Linked Insurance Plan, or ULIP, is a product that offers both insurance protection and investment returns. It serves as a great tool to get security and manage your finances.

So, the next obvious question that comes to mind is - how does it work?

Well, when you pay a premium for your unit-linked insurance plan, a part of the premium is utilised for your security, while the other part is used for investing in certain funds, wherein it helps in developing your wealth.

Premium allocation

The investment portion of your premium will be put in certain units, which you can select according to your preference, requirement, and financial management plans.

Now, let's talk about the difference between a traditional term insurance plan and ULIP.

Term insurance plan vs ULIP

A traditional term insurance plan tends to be opaque, as you have no clear idea about where your funds are allocated. You may also not have proper knowledge of the returns that you receive or the distribution of your premium amount.

Details in a ULIP document

On the other hand, when you have a ULIP in your name, you are able to enjoy full clarity. In your ULIP policy document, you find all the details about your policy, such as policy administration charges, policy allocation charges, policy redemption charges, policy switching charges, policy returns, and more.

Now, many people tend to get confused if they should invest in ULIPs or mutual funds.

ULIPs or mutual funds?

The main difference between the two that proves ULIPs are a better choice for investment is that mutual funds do not offer an insurance cover. Moreover, all mutual funds do not give you tax deductions, whereas all ULIPs provide tax benefits.

A few years ago, ULIPs’ popularity had begun to fade, as some private life insurers launched certain ULIPs that unnecessarily paid enormous commissions ranging from 60 to 100% of the premiums paid for the first year. This introduction of massive commissions led to wrong ways of selling ULIPs and it even led to financial scams. 

But, in order to revive the benefits of ULIPs, the Insurance Regulatory and Development Authority of India (IRDAI) introduced new measures. The quality of ULIPs was brought back again and they started to cater to the needs of investors looking specifically for long-term growth.

Now, the most important question is what one should keep in mind while selecting a plan.

With digital finance at its best, you can compare various life insurance options online including ULIPs. You can even apply for a ULIP online.

ULIPs: Key features

You may also check out some features that come with the new-age ULIPs, such as systematic monthly plans (SMPs), systematic withdrawal plans (SWPs), and systematic transfer plans (STPs). These features assist you in boosting your wealth and planning your retirement funds.

A ULIP is a good long-term investment that also offers reliable protection to you and your loved ones. It is also flexible and gives you an opportunity to satisfy your risk appetite in a safe way. However, it is always a good idea to consult an expert before investing.