ULIP stands for Unit Linked Insurance Policy. A ULIP is a life Insurance policy which provides a mixture of risk cover and investment. (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. It has kind of revolutionized Indian insurance industry. A decade back almost all insurance plans sold in India was Endowment Plan; however, after private players entered into the industry and stock market boomed, ULIPs displaced Endowment from its top position. Now over 60% of new plans sold in the country are ULIPs. When we talk of Insurance as an investment option, ULIPs have an important role as many of the investor nowadays goes for this as a profitable avenue.

With profits policies are called so because investment gains (profits) are distributed to policyholders in the form of a bonus announced every year. ULIPs also serve the same function of providing insurance protection against death and provision of long-term savings, but they are structured differently.

In "with profits" policies, the insurance company credits the premium to a common pool called the "life fund," after setting aside funds for the risk premium on life insurance and management expenses. Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The surplus in the life fund left after meeting these liabilities is credited to policyholders accounts in the form of a bonus. In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration charges and fund management charges.

The rest of the premium is used to invest in a fund that invests money in stocks or bonds. The policyholder's share in the fund is represented by the number of units. The value of the unit is determined by the total value of all the investments made by the fund divided by the number of units.

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ULIP investors have the choice of investing in a lump sum (single premium) or using the conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or monthly basis.

The insured (policy holder) can direct the company to invest in the fund of his or her choice. Insurers usually offer three choices - an equity (growth) fund, balanced fund and a fund which invests in bonds.

ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure. For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested

Most insurance companies permit their ULIP inventors to shift investments across various plans or asset classes either at a nominal or no cost (usually a couple of switches are allowed free of charge every year and a cost has to be borne for additional switches).

ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds well irrespective of the nature of the plan chosen by the investor.

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