Unit-linked insurance plans (ULIPs) have become something of a rage with their ‘promise’ of market-linked returns combined with the dual benefit of insuring your life from eventualities.

To put it simply, ULIPs attempt to fulfill investment needs of an investor with protection/insurance needs of an insurance seeker.

ULIPs work on the premise that there is a class of investors, which regularly invests its savings in products like fixed deposits, coupon bearing bonds, debt funds, diversified equity funds and stocks.

Some individuals take insurance to provide for their family in case of an eventuality. So both these categories of individuals (which also overlap to a large extent) have a portfolio of investments as well as life insurance.
ULIP as a product combines both these products (investments and life insurance) into a single product. This saves the investor/insurance-seeker the hassles of managing and tracking a portfolio of products.

ADVANTAGES OF ULIP:
■ Insurance cover plus savings. To begin with, ULIPs serve the purpose of providing life insurance combined with savings at market-linked returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of giving an individual the twin benefits of life insurance plus savings.

■ Multiple investment options. ULIPs offer a lot more variety than traditional life insurance plans. So there are multiple options at the individual’s disposal. ULIPs generally come in three broad variants:

• Aggressive ULIPs (which can typically invest 80%-100% in equities, balance in debt)

• Balanced ULIPs (can typically invest around 40%-60% in equities)

• Conservative ULIPs (can typically invest up to 20% in equities)

■ Flexibility: Individuals may well ask how ULIPs are any different from mutual funds. After all, mutual funds also offer hybrid/balanced schemes that allow an individual to select a plan according to his risk profile. The difference lies in the flexibility that ULIPs afford the individual. Individuals can switch between the ULIP variants outlined above to capitalize on investment opportunities across the equity and debt.

■ Works like an SIP
Rupee cost averaging is another important benefit associated with ULIPs. Individuals have probably already heard of the SIP, which is increasingly being advocated by the mutual fund industry.