Types of ULIP Plans

Unit Linked Insurance Plans (ULIPs) are a combination of life insurance protection and investment opportunities that are based on market performance. This makes it a hybrid financial product. Understanding the different types of ULIP plans is important because each plan is created to meet different needs of investors, whether it is for long-term wealth creation, retirement, funding for a child’s future, or to optimise tax efficiency. Selecting the correct ULIP plan can help investors align their investments with their financial objectives, risk appetite, and time horizon. This article explores the types of ULIP policy and how to select the right type of ULIP plans.

 

What are the different types of ULIP plans?

In India, there are different types of ULIP plans available to suit different investor needs. These plans have a different structure, and they may vary depending on several factors like investment objectives, fund strategies, payment mode, and the way the death benefits are paid out. Investors can further use a ULIP calculator to calculate how the premiums might grow with different types of ULIP policy and fund strategies. This makes the process simple.

 

Types of ULIP plans based on death benefits

Death benefit is the key feature of ULIPs as it provides financial security to the policyholder’s family under unforeseen circumstances. Depending on how the death benefit is paid, ULIPs are broadly divided into two categories.
 

Type 1 ULIPs

In a Type 1 ULIP, the policyholder has the option to select between the sum assured and the fund value, whichever is higher. The sum assured refers to the sum collected at the time of purchase. This also represents the minimum amount payable to the nominee. Meanwhile, there is a portion of the premium invested across different market-linked2 funds.  So, the fund value may fluctuate with market performance.
 

Type 2 ULIPs

Type 2 ULIPs provide more financial protection to dependants. Under this plan, the nominee receives both the sum assured and the accumulated fund value in the event of the policyholder’s death. Since the payout is more comprehensive, these plans have higher premiums compared to Type 1 ULIPs. They are well-suited for policyholders who prioritise stronger life cover along with the potential for market-linked² returns.
 

Type 1 vs type 2 ULIP plan

The table below shows the difference between Type 1 and Type 2 ULIP plan.

Feature	Type 1 ULIP Plan	Type 2 ULIP Plan
Death Benefit	The nominee receives either the sum assured or the fund value, whichever is higher	Nominee receives both the sum assured and the fund value
Premium Cost	The cost is relatively low due to the limited death benefit payout	Generally higher because of enhanced protection
Total Payout to Nominee	Single payout component (higher of the two)	Combined payout of insurance cover and investments
Best Suited For	Investors who focus on affordability and long-term wealth creation	Primary earners with financial dependents
Maturity Benefit	Depends solely on the accumulated fund value	Depends solely on the accumulated fund value
Example	This plan can be suitable for a 30-year-old planning long-term investments	Suitable for a 40-year-old with family responsibilities

 

Types of ULIP plans based on investment funds

There are different types of ULIP plans based on how the premiums are invested across different asset classes. Following are the list of ULIP types based on the fund investment.
 

• Equity funds

  ULIPs that are equity-oriented invest a major portion of premiums in equities and equity-related instruments. This type carries higher risk but offers strong long-term growth potential. This makes them suitable for young investors or those with long investment horizons who can tolerate market fluctuations.

• Debt funds

  Debt ULIP funds distribute their investments to government securities, corporate bonds, and other fixed-income instruments. The focus of a debt fund is to protect capital and have stable returns, which makes them suitable for investors or individuals who are approaching retirement.

• Balanced funds

  Balanced ULIP funds invest in a mix of equity and debt, maintaining a moderate risk-return profile. These funds can be suitable for investors who are seeking steady growth with reduced volatility compared to equity funds, especially first-time or risk-aware investors.

• Liquidity or capital market funds

  Liquidity ULIP funds invest in short-term capital market instruments such as treasury bills and commercial paper. They offer low risk, high liquidity, and potential returns, making them useful for short-term allocation or temporary investments during market uncertainty.

 

Types of ULIPs based on financial goals

Depending on the investor’s life stage, ULIPs are customised to support different financial needs across life stages. Selecting a goal-oriented ULIP helps align insurance protection with long-term investment planning.
 

• ULIPs for wealth creation

  This plan is created specifically for investors in the early earning phase who have a long investment horizon. Higher allocation to equity funds enables capital growth through compounding and market participation. Fund switching options allow investors to rebalance portfolios based on risk appetite or market conditions.

• ULIPs for child education planning

  The focus of this ULIP is on saving funds for the child’s education such as school fees, graduation fees, or higher studies fees. Many plans include a premium waiver feature, which makes sure there is regular investment if the parent passes away. This helps in having a safe and secure child’s future education needs while offering life cover to the policyholder.

• ULIPs for retirement planning

  This ULIP plan aims to create a steady retirement corpus through regular and long-term investing. This plan starts with equity exposure during earning years and gradually shifts to debt funds as retirement nears. At maturity, the collected funds can be withdrawn or used to generate post-retirement income.

• ULIPs for tax saving

  Under Section 80C and tax-exempt1 maturity benefits under Section 10(10D), this ULIP plan offers tax deductions on premiums. It combines insurance protection with investment growth, which makes it suitable for long-term tax planning. This plan provides flexibility through fund choice and switching, unlike traditional fixed-return tax-saving options.

 

How to choose the right type of ULIP plan

While choosing the right ULIP, it is important to make sure the policy goes with your financial needs, investment behaviour, and income pattern. The following are some factors that may help in making an informed decision.
 

Define financial objective

• It is important to first identify the purpose of the ULIP investment, it can be child education, retirement planning, or long-term wealth creation.
• Education-focused goals benefit from ULIPs with milestone-based payouts and partial withdrawal options.
• Retirement-oriented plans should offer long policy terms and options to shift funds to safer assets over time.
• Wealth creation goals generally require higher equity exposure for long-term growth.

 

Assess your risk appetite

• Review how much market fluctuation you can handle.
• Debt-oriented funds are suitable for low-risk investors with focus on capital preservation.
• Balanced funds work well for moderate risk-takers seeking stable growth.
• Equity funds are suitable for investors willing to tolerate volatility for potentially higher returns

 

Choose the right premium structure

• Regular premium ULIPs allow monthly or annual payments and suit individuals with steady income.
• Single premium ULIPs are suitable for those with surplus funds who prefer a one-time investment.
• Select a payment mode that matches the cash flow while ensuring long-term affordability.

 

Conclusion

Unit Linked Insurance Plans (ULIPs) are helpful in offering both life insurance cover and an investment based on the market. This makes it a versatile instrument for achieving different financial objectives. Through an insight into the various kinds of ULIPs, depending on the death benefit, investment funds and financial goals, an investor can choose a plan that matches their risk profile. Selecting the appropriate ULIP plan assists in long-term wealth accumulation, periodic financial safeguard of the dependents, and possible tax¹ benefits, which makes it a suitable choice for financial planning.