Buying a life cover is a huge step as it directly affects the future of your loved ones in your absence. There are several types of life covers available out there, and it can confuse you in selecting one for you. Unit Linked Insurance Plan (ULIP) is a type of insurance that stands out and has become quite popular. Before purchasing a ULIP policy, it is important to understand what makes it different from the rest of the insurances as it works differently when compared to traditional types of insurance.
What is a ULIP?
A ULIP is a financial product that is a combination of insurance and investment. Similar to other life insurances, you pay premiums on your ULIP plan. However, in a ULIP, the company uses part of it as a protective cover for your insurance and invests the remaining amount into different funds. Based on your ability to take risks, you can choose amongst different funds available. After the maturity of your policy, you get the sum assured. However, in the worst-case scenario where you are no longer alive, the sum covered in your insurance is given to your nominee along with any other gains.
What makes ULIP different from other insurances?
There are several factors of a ULIP policy that differ from other types of life insurance. Here is a comparison between ULIP and traditional types of life covers based on different factors –
By definition
Usually, life insurances simply provide you with a life cover. It acts as financial security for your loved ones in case of your demise. While a ULIP policy is more than life insurance. It is also an investment.
Different objectives
With traditional life policy, there is usually only one aim, which is to provide life cover. The sum assured is fixed and there is usually no element of investment involved. ULIP is a plan where the objective is to protect your loved ones and give returns on your investment.
The investment element
As ULIP is also an investment, there are returns involved. It is directly subject to market risks and hence, the returns are not fixed. They can be high or low depending on the funds you choose and how they perform. You can estimate these returns using a ULIP return calculator. Life insurance has fixed financial elements, as there are no investments involved.
The motive behind the purchase
When you are buying a traditional life policy, there is simply one purpose, to protect your loved ones financially. It can be short-term or long-term. Whereas, with a ULIP, you not only protect your family but also get returns on your investment. The additional motive here being that along with securing your family’s future, it also helps you meet your long-term investment goals.
Flexibility
With traditional insurances, there is no investment, and hence, there is no flexibility involved in the policy. ULIP is an extremely flexible plan. It allows you to switch between different funds so you can get maximum returns. Also, with a ULIP plan, you can get partial withdrawals when you need funds.
Tax benefits and regulatory body
Traditional insurances and ULIPs have tax benefits. The premiums that you pay on a life cover are exempt under sections 80C and 80D of the Income Tax Act of 1961. Also, the sum covered that your nominees receive from life insurance companies is also exempt from taxes. The Insurance Regulatory and Development Authority of India (IRDAI) regulates ULIP and all traditional life insurances.
Term and lock-in periods
There are different life insurances to choose from and you can opt for short-term or long-term ones. You can buy short-term insurances that cover you for a month or long-term insurances that cover you for a year or more. From a few months to a lifetime, you can choose a desired tenure. ULIPs are usually long-term investments and have a lock-in period of anywhere between three to five years.
The above differences make a ULIP stand out in comparison to traditional life policies. Now, there is no one best type of insurance for everyone. So, choose the type of insurance depending upon the risks that you will take. Also, it is important that you choose insurance that is well-aligned with your financial goals.