ULIPs (Unit Linked Insurance Plans) – Meaning & Working

ULIP is a hybrid product. It tries to be a "Swiss Army Knife" – giving you Insurance protection while investing your money in the Stock Market.

How ULIPs Work

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Key Features

1. Transparency: You can track the NAV (Net Asset Value) daily.
2. Flexibility (Switching): You can move money from Equity to Debt (and back) for free.
   • Tip: This is useful to protect gains when the market is high.
3. Lock-in Period: You cannot withdraw money for 5 Years. (This enforces discipline).
4. Taxation: Maturity proceeds are exempt under Sec 10(10D) if premium is < ₹2.5 Lakhs. (If > ₹2.5L, it is taxed like Mutual Funds).

The "Charges" Controversy

ULIPs are infamous for hidden charges.

1. Premium Allocation Charge: Deducted upfront from premium (0-5%).
2. Policy Admin Charge: Monthly fee.
3. Mortality Charge: Cost of providing life cover.
4. Fund Management Charge (FMC): ~1.35% per year.

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ULIP vs Mutual Fund

• Mutual Fund: Pure investment. Lower lock-in (0 or 3 years). Lower expense ratio.
• ULIP: Bundled product. Higher lock-in (5 years). Includes insurance cost.

Summary

• Hybrid: Market linked returns + Life Cover.
• Long Term: Don't buy ULIP for 5 years. Buy for 10-15 years to recover costs.
• Tax Benefit: One of the few instruments allowing switching between Equity/Debt without tax.

Quiz Time! 🎯

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Next Chapter: Introduction to General Insurance! 🚗