Investment And Insurance: What Is Unit-linked Insurance Plan That Offers Dual Benefits?

While presenting the Union Budget 2023, finance minister Nirmala Sitharaman announced the proposal to limit income tax exemption from proceeds of insurance policies with very high value.

“Where aggregate of premium for life insurance policies (other than ULIP) issued on or after 1st April, 2023 is above Rs. 5 lakh, income from only those policies with aggregate premium up to Rs. 5 lakh shall be exempt.”

An individual will be liable to pay tax on the maturity amount of life insurance policies (other than ULIP) where the aggregate annual premium exceeds Rs 5 lakh. However, this will not affect the tax exemption provided to the amount received on the death of a person insured.

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What is ULIP?

ULIP or Unit Linked Insurance Plan, is an insurance plan that offers dual benefits in a single product: investment and insurance. ULIP comes with a lock-in period of five years.

The premium paid towards a ULIP is divided into two parts. A part of it is contributed to your life cover and the remaining is invested in the fund, which is of your choice.

One can choose to invest in equity, debt, or a combination of both funds as per your risk appetite and goals.

Broadly, the life insurance policies are categorised into two types;

1) Traditional plans

2) Unit Linked Insurance Plans

Traditional policies offer in-built guarantees and define maturity benefits through a variety of products such as guaranteed maturity value. The investment risk in traditional life insurance policies is borne by life insurance companies. These policies are ideal for policyholders who are not market savvy and do not wish to take investment risks.

ULIPs, on the other hand provide a combination of risk cover and investment. In these policies, the investment risk is borne by the policyholder. More importantly they offer a flexibility to decide your risk taking profile.

However, the investments made in ULIPs are subject to risks associated with the capital markets.

What is a ULIP unit fund?

The allocated (invested) portions of the premiums, after deducting all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders, are pooled together to form a Unit fund. Unit is a component of the fund in a unit linked policy.

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