It looks like a mutual fund. It pays returns like a mutual fund. But it's actually unit-linked insurance. And it's perfect for investors who want to keep a track of their money and decide where it is invested.

What are unit-linked insurance plans and how do they work? ULIPs are similar to traditional insurance policies with the exception that their cash value at any time reflects the market value of your premiums invested by the insurance company.

Then, they turn one basic concept of insurance on its head. In regular insurance policies, the customer first decides how much he/she wants to be insured for (the sum assured), and the premium is calculated accordingly.

In a ULIP scheme, the customer tells the insurance company how much he/she can pay as premium. The insurance company then tells the customer what the sum assured will be for that premium.

In some ways, ULIPs operate very much like mutual funds. They invest in a basket of securities and allow customers to control their investments by deciding whether the money should be invested in the debt and money markets or in equity.

They can also allocate assets in such a way that part of the money is invested in debt and part in equity. Some companies also give the option of putting money in gilts.

At present, ICICI Prudential, Birla Sun Life, Aviva and Om Kotak Mahindra are providing ULIPs. Barring a few differences here and there, the plans are pretty similar.

Part of the premium paid is adjusted towards administrative charges and risk cover charges, while the rest is invested in a plan of your choice (equity, debt or balanced fund).

For instance, in case of ICICI Prudential's Lifetime policy, the minimum annual premium is Rs 18,000. The sum assured is upto 30 times the premium paid. Thus, by paying an annual premium of Rs 20,000, your sum assured can be anywhere between Rs 100,000 and Rs 600,000.

The choice is yours. However, the higher the sum assured, the lower is the amount invested in units and so depending upon your insurance needs you have to strike a balance.

Of course, if during the policy you ever feel that your liabilities have increased and you need more cover, then you can increase your sum assured by 25 per cent. Similarly, you can also decrease it.

What's more, if you are dissatisfied with the way the funds are performing, then you can switch between the various plan options. For example, if you had initially put 60 per cent in equity, 30 per cent in debt and 10 per cent in a balanced fund, and the market is not doing too well, then you can switch 60 per cent to debt, 30 per cent to equity and leave 10 per cent to the balanced fund.

Most companies allow switching free of cost, once a year, and charge a minimal rate after that. For instance, Birla Sun Life allows two such switches in any policy year free of cost, and charges 1 per cent of the amount switched after that. Om Kotak, on the other hand, allows innumerable switches in a year, free of cost.

The companies also give you the option of increasing the premium amount whenever you have surplus funds. This provides flexibility in terms of expanding contributions and the time to do it.

In most cases, there is a lock-in period of two or three years and after that you can withdraw from the fund amount.

For instance, in case of ICICI Prudential, there is no maturity date. Any time after three years, you can make partial or complete withdrawals. In case of partial withdrawals, you need to maintain a minimum balance of Rs 10,000 across all funds.

On the other hand, Om Kotak Mahindra's Safe Investment Plan has a maturity period of between 10 years and 30 years. The lock-in period is three years. After that you have to surrender the insurance. You get the value of the units minus 2.5 per cent, which is termed as exit load. There is no partial withdrawal facility.

Under all ULIPs, if the person insured dies, the nominee gets the sum assured or the value of the fund, whichever is higher.

Being an insurance plan, whatever amount you contribute towards premium is eligible for tax exemption under Section 88. What's more, the withdrawals, which you might make or the returns that your nominee will get on your death are tax free under Section 10 (10d).

In most schemes, the minimum age at entry is 18 and the maximum age at entry is 60.

ULIPs also provide a choice of riders including accident and disability, critical illness and major surgical assistance.

ULIPs are useful for those who want to be insured but at the same time are interested in investing in an avenue, which matches their risk-return profile. These policies are meant for those who are not looking at pure insurance but at an investment.

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