Unit-Linked Insurance Plans (ULIP) combine the benefits of insurance cover, investment and tax-break. The investment risk, however, is borne by the investor as the return is not guaranteed by insurance companies. The return is based on the performance of the capital market and also depends on the selection of the scheme.

There are various types of unit-linked insurance plans with assorted risk profiles catering to different investment objectives. Equity funds bear medium-to-high risk, as these funds invest in stock markets to seek capital appreciation.

There are income funds which invest in fixed income securities such as corporate bonds and government securities. Another category is cash funds, which invest in money market instruments that carry a low risk. Insurance companies also offer balanced funds under ULIP with medium investment risk.

These funds invest in equity as well as fixed income securities to balance the risk. However, as the performance is not guaranteed, one should choose the schemes based on his risk appetite. There are plans for retirement, long-term savings, getting health benefits and the like.

The schemes under life insurance are eligible for deduction under Section 80C. Pension plans are eligible for deduction under Section 80 CCC. The health insurance plans and critical illness riders offer tax benefits under Section 80D.

Effective long-term tool

ULIPs help get attractive returns over a long-term (say, 8-10 years). Short-term returns are not much because the cost structure of the schemes is higher in the initial years. The cost structure includes premium allocation charge, policy administration charge, fund management charge and mortality charge. Over a long-term, there will be a reduction in cost, allowing a greater allocation of premiums to the funds concerned.

varadharajan.srinivasan@

thehindu.co.in