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Saturday, September 4, 2010

what is ULIP?

ULIP (Unit Linked Insurance Plan/Policy) is a life insurance policy which also gives the benefits of the investment along with the risk cover. It is important to notice that in a ULIP investment risk is borne by the investor.

In ULIP after deducting all charges and the premium for risk cover, rest premium is invested. Investment in ULIP’s can be done in a lump sum (single premium) or periodic premium plans.

Types of ULIPs

(1)Equity ULIP Scheme: Investment is done in stocks with the general aim of capital appreciation. As the investment is done in the equity, risk is higher.

(2)Fixed income ULIP Scheme: Investment is done in corporate bonds, government securities and other fixed income instruments. As investment is done in debt instruments, risk is lower.

(3)Money Market ULIP Scheme: Investment is done in bank deposits and money market instruments. The key feature of this fund is the liquidity.

(4)Balanced ULIP Scheme: Investment is done in both debt and equity instruments.

Advantages:

(1)Tax benefits under section 80 c can be availed till 31/3/2012. DTC (Direct Tax Code) is supposed take away tax benefits.

(2)Investors have choice of choosing type of investment mode (Debt/Equity/Balanced).

Disadvantages:

(1)ULIPs are long term products and the investor with short-term outlook should better avoid it. Investor with time horizon of 10 years or more only should think for ULIP's.

(2)Insurance part of ULIP costs more.

(3)ULIP's are less transparent than Mutual Funds.

(4) High administrative, mortality and fixed annual charges.

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