A unit-linked insurance plan (ULIP) is a financial tool that provides risk cover as well as investment options for the policyholder. ULIPs allow the policyholder to invest in variety of financial instruments such as stocks, bonds or mutual funds. Based on his/her risk appetite, the policyholder can choose the investment type as all option guarantee returns.
Its noteworthy, that initially ULIPs did not assure returns and were primarily positioned as a long-term wealth generation product. However, nowadays, almost all ULIPs offer investors with assured returns of at least doubling their initial investment.
When policyholders invest money in ULIPs, the insurance company invests half the amount in the equity markets (shares, bonds etc.) while the other half is set aside towards providing life insurance policies. As these investments are managed by fund managers from the insurance company, it takes away the need for policyholders to track them.
ULIPs allow the policyholder to invest in multiple options based on his/her risk appetite. ULIP options range from low-risk to high-risk. Additionally, ULIPs also allow the policyholder to switch between their investments, allowing them to maximise their gains when market conditions are favourable.