Unit-Linked Insurance Plans (ULIPs) have emerged as one of the best financial instruments available in the market today. If you do not know ULIP plan meaning and why it is a popular wealth generation tool, you will find answers to your questions.
ULIP is a type of insurance plan that features a combination of two factors, insurance and investment. A part of your premium that you pay for the ULIP is utilized for insuring your life. The insurer invests the other portion of the premium in the financial market to help you earn attractive returns in the long run.
Insurers in India offer many types of plans, and it can be a difficult task to ascertain which type of ULIP policy may be ideal for your needs. To help you select the right ULIP, we have briefly explained some kinds, which insurers provide.
Different types of ULIPs
Not all ULIPs invest a part of the premium that you pay in equity funds. Many insurers invest your hard-earned money in other financial products. Here are various ULIPs as per the different types of funds where insurers invest your money.
- Equity funds
In this type, the insurer invests your premium in the equity market to buy equity shares of various companies. As the performance of equity investment is entirely dependent on the market fluctuations, it is considered quite risky in comparison to other types of ULIPs. However, by investing in equity funds, you have the opportunity of earning higher returns as well.
- Debt funds
Here, the insurer invests your money in debt funds, like government securities, bonds, and debentures, among other instruments. Investing in these funds is ideal for you if you are a risk-averse investor. Here, the risk is low, and so are the returns.
- Liquid funds
In this kind, your money gets invested in liquid funds, such as certificate of deposit and treasury bills, among other avenues with a motive to meet short-term financial aspirations. When compared to other ULIPs, the duration of maturity in liquid funds is shorter; it can range from a couple of weeks to a few months. Investments in liquid funds are considered safe, as they have strong credit ratings.
- Cash funds
Many insurers invest investors’ money in cash funds, like market funds, term deposits, and cash deposits. Such funds have a negligible risk factor. Therefore, the returns are also significantly low. You can consider such type of investment if you do not want to take any risks.
Besides such funds, ULIPs are classified as per their wealth-creation capacity. These funds let investors maximize the returns on investments. Guaranteed and non-guaranteed ULIPs, single and regular premium ULIPs, and life-staged ULIPs are some other types of ULIPs you should know about before investing in a policy.
If you plan to invest your savings in ULIPs, determine your risk-taking capability, and then invest in a type of fund. Moreover, you need to identify your long-term financial goals and wisely purchase a ULIP policy that can help you achieve the same. As switching from one fund to another is possible in ULIP, you can make the most of the market fluctuations and cater to your changing financial goals and risk-bearing appetite.