The interest of the general public in the financial sector has grown quite considerably in the last few years. The extensive availability of knowledge and resources with which one can plan their finances properly may be a strong reason for this increased interest. The same may hold true for the insurance sector as well. A larger number of people now want to insure their life. But many are not content with a basic life insurance policy. They want a savings component or a chance at wealth generation as well. A ULIP would be the perfect product for such seekers. What is a ULIP and how is your money used differently in a ULIP? We answer these questions below.
What is the meaning of a ULIP plan?
A ULIP, or Unit-Linked Insurance Plan, merges insurance and investment. That is, the premium for a ULIP is directed in two places – the life coverage for the insurance aspect and the investment into the instruments of your choice. The investment is carried out by the insurance company after pooling together money from several policyholders. The pooled money is then invested into financial instruments.
The policyholder is allotted units according to their share of the pooled money. A higher amount of money means more units, resulting in higher returns. The workings are similar to that of a mutual funds scheme. If you are new at investment, then you can use the ULIP calculator to understand the returns you would possibly get with a particular amount.
In which instruments is the money invested in a ULIP?
There are mainly two asset classes you can choose from in a ULIP – equity instruments and debt instruments. One can also opt for a balance of both.
- Equity investments
Equity instruments are those which are linked to the market. When you opt for equity investment, the insurer puts your money in market-linked instruments (stocks and shares listed on the stock exchange). The return on your investment is, thus, dependent on market performance. If the market is on a high, the returns are higher. If the market is going through a low, the returns will be affected by the same. Hence, individuals who have a higher risk appetite and are fine with the high-risk, high-reward approach usually opt for equity investments.
A ULIP calculator also helps the user understand how well their investment might perform in equity investment as compared to other kinds of investment.
- Debt funds
When you choose to invest your money in debt funds, the insurer puts your money in bonds and other instruments of debt issued by private organisations or the government. As they are not linked to the market but are rather influenced by fluctuations in the interest rates, they do not hold as much risk as equity investments. Thus, those who are risk-averse, or who do not wish for their money to go through ups and downs, can opt for debt funds in their ULIP portfolio.
- Balanced funds
Now, there might be people that may be risk-averse but may also want to try their hands at investing in the stock market to gain good returns. This is where balanced funds become the ideal investment option. Balanced funds comprise both, equity and debt options, and are suitable for those with a moderate risk profile.
The biggest benefit of a ULIP is that the policyholder can switch between the funds as per their needs. So, let’s assume that 70% of your funds are invested in equity investments and 30% in debt instruments as per your risk profile. Now, from your understanding of the market performance, you have estimated that there is going to be a record low sometime soon. You do not wish to incur the losses due to this low. What you can do in this situation is reach out to your insurer and ask them to switch the funds completely to debt funds. And, once the low rides over and the market is back to its regular ups and downs, you can switch the funds back to equity funds.
Some insurers allow only a limited number of free switches a year, while others may have unlimited free switches a year. So, choose accordingly.
We hope this article has increased your understanding of the meaning of a ULIP and how your ULIP investments are utilised.