Smith 
Life insurance plans are a necessity in present times. Without one, your dependents can be left without any financial backup in the event of an unfortunate demise or disability. Among the several plans that can be purchased, a Unit Linked Insurance Plan (ULIP) is a unique policy offering insurance and investment in one plan. These ULIP plans invest in market-linked securities while offering life insurance coverage. Hence, they are also known as insurance-cum-investment plans.
The investments via ULIPs are made in market-linked instruments in different types of funds. Equity funds, debt funds, balanced funds, liquid funds, and cash funds are some of them. The fund value at any point during the policy tenure is calculated by multiplying the number of units by the price of each unit. The price of each unit is defined by NAV (Net Asset Value) and is based on the prevailing market conditions.
This article explains how you can make use of ULIPs for long term wealth creation and meeting financial goals.
1.Lock-in period
ULIPs are issued with a mandatory lock-in period of five years. Erstwhile, this period was three years, until 2009, when the regulator increased the lock-in period to make it a suitable avenue for long-term growth. The mandatory lock-in period inculcates financial discipline by investing periodically towards achieving your financial goals. Further, this lock-in period is calculated from the date when the policy is issued, unlike an equity-linked savings scheme (ELSS), where every investment made has a mandatory three-year lock-in period from the date of its investment, be it by way of SIP or lumpsum.
Since ULIPs invest in market-linked securities, the lock-in period helps flatten out any fluctuations that occur in the financial markets while creating wealth. Further, the lock-in also restricts policyholders from dipping into the kitty to fund immediate financial needs and ruin the wealth creation process. But, after the five-year period, you are free to switch funds or even make partial withdrawals.
2. Insurance and Investment
As described above, a ULIP is a dual-benefit product that offers insurance and investment in one plan. It places significant emphasis on one of the critical pillars of financial planning, which is financial security by way of a life insurance cover. However, it does not ignore wealth creation for meeting one’s financial goals. So, when buying a ULIP plan, you not only get financial security, but also a discipline that is required to compound your wealth into attainable financial goals.
3.Realignment of investments
Unlike traditional insurance policies where investments cannot be realigned, these transparent investments in market-linked securities via a ULIP can be realigned during the policy tenure. A ULIP offers several different fund options, where an investment can be made and realigned too. This process is called fund switching and is a highlight feature of a ULIP.
For instance, you invest in three funds — equity, balanced and debt funds, in the proportion of 50%, 30% and 20% respectively. Accordingly, the premium net of any charges will be invested in these funds in the specified proportion. During the policy tenure, depending on your financial goals, you can modify or switch the investment. In the above example, switching to 60% balanced and 40% debt can help in the preservation of wealth as your age increases. Partial withdrawals are also allowed during the policy tenure, once the lock-in period ends.
4.The flexibility of policy based on capacity and needs
When buying a ULIP plan, you, as a policyholder, have the option to select the annual premium, payment terms, and even the policy duration. Thus, depending on your needs, priorities and goals, you can modify the investment and its tenure. In this process, you can use a ULIP calculator, which is a free tool offered by insurance companies.
5.Choice of investment management options
ULIPs also allow policyholders to manage their investments based on their preferences. For instance, they can use the insurance company’s investment strategies or even invest based on their understanding of the performance of the funds. The NAV is a critical component for analysing the fund’s performance.
6.Tax benefits
The premiums paid for ULIPs and even their returns (subject to conditions) are eligible for deduction under Section 80C of the Income Tax Act. Thus, you not only get insurance and wealth creation, but also tax benefits from ULIPs.
Using the above benefits, ULIPs are an ideal investment choice balancing the protection and wealth creation aspects of investing.