April 24, 2024

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Understanding ULIP and how it works as an insurance + investment

Unit Linked Insurance Plans (ULIPs) are innovative financial products that blend insurance coverage with investment opportunities. This dual-benefit approach allows individuals to secure their future financially while also potentially growing their wealth. Through this guide, we’ll break down what ULIP is, how it functions, and how you can utilise a ULIP calculator to make informed decisions.

Understanding ULIPs

When you delve into what is ULIP, you discover it’s designed for policyholders to achieve dual objectives through a single plan. The premium paid towards a ULIP serves two purposes: a portion is allocated as a risk cover for the plan, which is the insurance component, ensuring the policyholder’s family’s financial security. 

Simultaneously, another portion of the premium is channelled into various investment funds, which could be equity, debt, or balanced funds, depending on the individual’s risk tolerance and financial aspirations. This strategic blend allows individuals to tailor their investment strategy to meet their long-term goals while maintaining the essential safety net of insurance.

How does ULIP work?

When you purchase a ULIP, the insurance company invests a part of your premium in shares, bonds, or mutual funds, while the remainder goes towards your life insurance coverage. Here’s a step-by-step breakdown of its functioning:

  1. Premium payment: You start by paying a premium, which can be done monthly, quarterly, or annually. Some ULIPs also allow a single premium payment.
  2. Charges deduction: Before allocation to selected funds, certain charges are deducted from the premium. These can include premium allocation charges, policy administration charges, fund management fees, and mortality charges for insurance coverage.
  3. Investment of funds: The net premium (after charges) is invested in funds of your choice. Each unit in the fund has a net asset value (NAV) that fluctuates based on the fund’s performance.
  4. Insurance coverage: A portion of the premium goes towards providing life insurance cover, ensuring financial security for your family in the event of your untimely demise.
  5. Monitoring and switching: Policyholders can monitor the performance of their investments and switch between funds based on their risk tolerance and market conditions.

Benefits of ULIP

Unit Linked Insurance Plans (ULIPs) provide a unique combination of financial security and investment opportunity, making them a compelling choice for savvy investors. 

One of the standout features of ULIPs is their dual advantage. They not only offer life insurance coverage, ensuring your family’s financial safety in your absence, but also allow you to grow your wealth by investing a part of the premium in various funds. This blend of insurance and investment offers a holistic approach to financial planning.

Flexibility is another key benefit, as ULIPs empower policyholders with the ability to switch between funds. This means you can adjust your investment strategy based on changing market conditions or personal financial goals, optimising your returns over time.

Furthermore, ULIPs are designed with transparency in mind, providing regular updates on the value of investments. This feature enables policyholders to track their investment performance and make informed decisions.

Lastly, the tax benefits associated with ULIPs are highly attractive. Premiums paid towards ULIPs are eligible for tax deductions under Section 80C of the Indian Income Tax Act. Moreover, the maturity proceeds are exempt from tax under Section 10(10D), subject to certain conditions, making ULIPs an efficient tax-saving instrument. 

This suite of benefits underscores the value of ULIPs in a well-rounded financial portfolio, offering both protection and growth.

Using a ULIP Calculator

A ULIP calculator is an online tool that helps you estimate the returns on your ULIP investments. By inputting details such as the premium amount, payment frequency, investment term, and expected rate of return, you can get an approximate idea of the maturity value of your ULIP policy. This tool is instrumental in planning your investments and insurance coverage effectively.

Let’s consider an example to understand the financial implications of investing in a ULIP:

  • Premium: ₹1,00,000 annually

  • Investment Term: 20 years

  • Allocation Charge: 5% (for the initial years)

  • Expected Rate of Return: 10% annually

Year 1 Calculation:

  • Allocation Charge: 5% of ₹1,00,000 = ₹5,000

  • Net Investment: ₹1,00,000 – ₹5,000 = ₹95,000

Assuming the other charges (administration, mortality, fund management) total ₹5,000 for the year, the amount invested would be ₹90,000.

If the fund grows at an expected rate of 10% per year, the investment would increase, and over 20 years, the fund value would be subject to market risks and chosen fund performance.

It’s crucial to remember that the actual value of your investment in a ULIP can vary based on the funds’ performance, charges, and other factors. Hence, using a ULIP calculator can give you a clearer picture and help you make informed decisions.


ULIPs stand out as a versatile financial tool for those looking to combine the benefits of insurance and investment. With the ability to choose where your money is invested, the flexibility to switch between funds, and the advantage of tax benefits, ULIPs can be a valuable addition to your financial portfolio. 

However, like any investment, it’s essential to conduct thorough research, consider your financial goals, and utilise tools like a ULIP calculator to understand the potential outcomes of your investment. With careful planning and strategic investment, ULIPs can help secure your financial future while providing the safety net of insurance coverage.