ULIP stands for Unit Linked Insurance plan. Initially it’s lunched by Unit Trust of India in the year 1971.
With the subsequent issue of major guidelines by the IRDA in 2005, several insurance companies have started offering unit linked insurance plans by providing an investment cum insurance product.
A part of the premium that you pay for Unit Linked Insurance Policy is used to cover up the insurance and the remaining portion is invested in various market instruments (i.e. debt and equity) in different proportion.
ULIP’s Net asset values is like mutual funds which also fluctuate based on the fluctuations in prices of the share market.
Before investing into a unit linked insurance policies or UILP, you should be prepared to take the market risk. In Unit Linked life insurance plan, policy holders have the option of selecting the debt and equity mix.
A unit linked insurance plan or ULIP can be a better choice if;
- You have already invested in a term plan and endowment plan.
- You understand that unit linked insurance policies have a portion invested in market.
- You will not exit ULIP policy in 5-6 years time period.
- You know switching option of Unit linked insurance plan i.e. you can switch between debt and equity investment based on the market movement.
- You are ready for the premium that is paid for this policy.
In comparison to ULIP, mutual funds are a simpler, transparent and a cheaper option for wealth creation. In mutual fund you also have the flexibility of changing the mutual fund scheme in between at any time you want.
ULIP products have a lock-in period i.e. if you have invested in ULIP then you have to remain invested for a lock-in period of 3-5 year where as you can buy or sell mutual fund at any time during the year.
But, there are mutual fund known as closed mutual funds where you can not get out within a period of 3 year after investing your money in it.
But most of the mutual funds are not close fund. ULIP charges are higher where are mutual fund charges are less. Your investment in ULIP is eligible for tax deduction U/S 80C of the income tax act, 1961.