Are you planning to make an investment in a financial instrument? Then, an option you would want to consider is a ULIP plan. For the uninitiated, a ULIP also called a Unit-Linked Insurance Plan, is a financial product that provides you dual benefits. First, you get to invest in different kinds of funds and earn returns on them. Secondly, you also get the coverage of a life insurance plan. This is an efficient way of managing both elements of financial well-being with the help of a single product. Even within ULIPs, there are multiple types suitable for different life stages and goals. What are these different types of ULIP and which one should you go for? We list them down below.
But first, let us understand how ULIPs work.
How does a ULIP policy work?
Your ULIP premium is used to execute two different functions: one part goes towards building your life coverage amount while the other part gets invested into financial instruments of your choice. Depending on the policyholder’s risk tolerance, the investments can be made in equity funds, debt funds, or hybrid funds that provide the best of both. With the help of the fund switching option, the policyholder can transfer the money from one type of fund to another. ULIPs usually have a lock-in period of five years, during which one cannot make any withdrawals.
A ULIP plan calculator can be used to get a better understanding of the amount of returns you can expect at certain points in time. The returns differ as per the type of fund chosen.
Different types of ULIPs
There are multiple types of ULIP classification. Here, we have classified them based on three aspects:
Based on financial objectives:
Child ULIP plans
These plans are designed to provide financial protection for your children’s future. The workings of different child plans vary from policy to policy. Some child plans are valid till the primary policyholder (that is, the parent/guardian of the concerned child) passes away. Other plans, on the other hand, continue to be valid until the child reaches a certain age.
The sum assured amount is then provided to the child on the occurrence of the covered situation. This amount aims to help the child pursue their own paths and fulfil their dreams without any worries about a shortage of funds.
ULIP retirement plans
Retirement plans are a popular option amongst the many types of ULIP plans. As the name suggests, these plans have a longer tenure that helps particularly during the retirement period of the policyholder. You can opt for a retirement-oriented ULIP plan a few decades before you retire. Or you can even buy it a few years just before you retire. The premiums will vary accordingly. You should invest a solid amount regularly to ensure that you are financially well-off after you retire.
Once you retire, you receive a regular pay-out to act as a replacement for your income. A ULIP plan calculator can also help you out when you are carrying out your retirement planning.
Based on risk
As you may be aware, a ULIP policyholder can opt for a variety of funds as per their risk appetite. Those ULIPs which are oriented toward low-risk options such as fixed deposits, government bonds, private bonds, treasury bills, and so on, are referred to as low-risk funds.
High-risk/ Equity ULIPs
Similarly, ULIPs that are focused more on the equity funds rather than debt options are referred to as high-risk or equity ULIPs. When you opt for equity ULIPs, your money is invested in stocks, money market funds, high-risk bonds, and the like. There are also options, such as mid-cap, large-cap, and small-cap equity funds as well.
Based on the life cover amount
Type I ULIPs
In this type of ULIP plan, the sum-at-risk amount (which the insurer has to pay from their own pockets) decreases as the fund value grows. When the fund value rises to more than the sum-at-risk amount, the insurer is exempted from paying anything from their own pockets. When the policyholder passes away, the beneficiaries receive the amount that is the higher of the two, the sum-at-risk or the fund value.
Type II ULIPs
In this policy, the beneficiaries receive the total of the sum assured amount plus the fund value of the ULIP plan. This leads to more robust financial help for your loved ones in your absence.
Do consult a professional and read the terms and conditions of the policy before signing.