Unit Linked Insurance Plans
These are unique insurance plans which are basically a mutual fund and term insurance plan rolled into one. The investor doesn't participate in the profits of the plan per se, but gets returns based on the returns on the funds he or she had chosen.
The premium paid by the customer is deducted by initial charges by the insurance companies (basically the distribution and initial costs) and the remaining amount is invested in a fund (much like a mutual fund) by converting the amount into units based upon the NAV of the fund on that date.
Mortality charges, fund management charges and a few other charges are deducted in regular intervals by way of cancellation of units from the invested funds.
A Unit Linked Insurance Plan (ULIP) offers high flexibility to the customer in form of higher liquidity and lower term.
The customer has the choice of choosing the funds of his choice from whatever his/her insurance provider has to offer. He can switch between the funds without the necessity to opt out of the insurance plan.
ULIPs got extremely popular in the heyday of the equity bull run in India, as the returns generated in equity linked funds were beating any kind of debt or fixed return instrument. However, with stagnation of the economy and the equity market this product category slowed down.
Read more about this topic: Life Insurance
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