A unit linked insurance plan (ULIP) is an insurance product that serves two purposes. It allows the policyholder to create wealth as well as provides life insurance. A policyholder has the option to choose from various funds based on his/her risk appetite, financial objectives, etc.
In this article, we will discuss 4 fund options in ULIP based on their nature of risk.
Nowadays, many investors are adding ULIPs in their portfolios. This is because of the benefits a ULIP offers. A ULIP provides market-linked returns along with life insurance cover. This is what makes it a distinct insurance product.
A ULIP allocates a part of the premium in various investment instruments. Meanwhile, the remaining amount is earmarked for life cover.
Benefits of a ULIP
- Multiple Investment Options
ULIPs are available in various investment options such as equity funds, debt funds, etc. A policyholder can choose a fund based on his/her risk appetite.
In order to maximise profits, policyholders are also allowed to pay top-ups, over and above their current premium amount.
- Tax Benefits
Apart from market-linked returns and life cover, ULIPs also offer tax benefits. Under Section 80C, a policyholder can avail tax deductions up to Rs. 1.5 Lakh on the premiums paid for a ULIP plan.
Furthermore, if the policyholder passes away, then the nominee receives the returns generated as well as a sum assured. There is no tax liability on this amount.
Selecting the Right ULIP Plan
Investing in a ULIP is a great way to achieve financial goals. However, to reap the benefits of a ULIP, a policyholder needs to select the right plan based on his/her risk appetite.
Here are a few fund options available in ULIPs-
- Equity Funds
These funds primarily invest in shares or stocks of a company. Equity funds, also called growth funds, are the riskiest ULIP funds. These funds follow a high risk, high reward approach. The main aim of equity funds is to achieve capital appreciation.
Policyholders with a high-risk appetite should consider equity funds. Depending on the market value of stocks, there are multiple funds like mid-cap, large-cap, and micro-cap funds.
- Debt Funds
Under these ULIPs, the investment will be made in government securities, fixed income bonds, corporate bonds, etc. These funds offer medium risk and medium reward.
- Balanced Funds
Balanced funds are the most stable funds. These funds invest in equity as well as debt instruments. This way, these funds balance the high risk of equity funds with the stability of debt funds. Therefore, balanced funds can enable a policyholder to earn high returns while incurring medium risk.
- Cash Funds
Cash funds primarily invest in money market instruments like cash and bank deposits, treasury bills, etc. They are also called liquid funds or money market funds. Cash funds are a good option for policyholders with a low-risk appetite.
Why Investing In a ULIP is a Good Idea
A ULIP is a great investment tool because it allows you to maximise your savings and provides you with life insurance. Furthermore, it can help you build a sufficient corpus for your post-retirement life.