Unit Linked Insurance Plan
Also written ULIP · Unit Linked Insurance Plan (ULIP) · Unit linked plan
A life insurance policy in which the premium, after the cost of risk cover and expenses, is invested in equity or debt funds chosen by the policyholder, so the maturity value is the fund value.
In plain language
A ULIP is two products wearing one contract. Part of every premium buys life cover. The rest, after expenses, buys units in a fund that the policyholder selects — equity, debt, or a mix.
That second half is why the workbook groups ULIPs with investment-linked insurance rather than with protection. There is no bonus, no declared rate and no guarantee: returns are linked to the performance of the markets, each fund carries the risk and return profile of the asset class it holds, and the policyholder may switch between funds.
At maturity the policyholder receives the value of the fund on that date. Whatever that happens to be.
How it works
The workbook places the ULIP alongside three neighbours in section 2.10.8, and the contrast is the teaching point:
| Product | What determines the payout |
|---|---|
| Endowment | Sum assured plus accrued bonus — a level-premium savings plan, low rate of return |
| Whole life | Guaranteed death benefit and guaranteed cash values; mainly used to create an estate for heirs |
| Variable Insurance Product (VIP) | A policy account with a defined minimum floor rate of return, plus index-linked or bonus additions; minimum term 5 years, lock-in 3 years |
| ULIP | The fund value. No floor, no guarantee |
Premium structures. A ULIP may be single premium, or carry a limited premium payment period shorter than the policy term. The sum assured is a multiple of the annual premium. The policyholder may also pay top-ups, which are invested after the mandatory assignment to risk cover.
Death benefit is the part that has to be read in the contract, because the workbook gives three possible wordings: the beneficiary receives either the sum assured, or the higher of the fund value and the sum assured, or the sum assured and the value of the fund — depending on the terms of the policy.
A worked example
A 40-year-old buys a ULIP with an annual premium of Rs 1,00,000 and a sum assured of 10 times the annual premium — Rs 10,00,000. He dies in year 12, when the fund value is Rs 18,50,000.
What the family receives depends entirely on which of the three wordings the policy uses:
| Policy wording | Amount paid |
|---|---|
| Sum assured | Rs 10,00,000 |
| Higher of fund value and sum assured | Rs 18,50,000 |
| Sum assured and fund value | Rs 28,50,000 |
Rs 18.5 lakh of spread on identical premiums, identical fund performance and an identical sum assured. Nothing in the brochure's headline figures distinguishes the three. Only the contract does — which is why the workbook lists all three rather than stating one rule.
Contrast the maturity side. If he had survived to maturity, he would receive the fund value and nothing else: Rs 18,50,000 if the markets had been kind, and materially less if they had not. An endowment of the same premium would have paid the sum assured plus accrued bonus regardless — the workbook's note that the rate of return on endowment policies "is quite low" is the price of that certainty.
Why NISM asks about it
Chapter 2, section 2.10.8 (Investment linked Insurance Products), covers ULIPs immediately after endowment, whole life and Variable Insurance Products. The examinable work is discrimination: which product carries a guaranteed floor (the VIP, not the ULIP), which pays the fund value at maturity (the ULIP), which is used mainly to create an estate for heirs (whole life), and which returns a percentage of the sum assured at intervals (money back, a type of endowment). Expect at least one question on the three death-benefit structures.
Common exam traps
- The ULIP has no floor; the VIP does. The Variable Insurance Product is the one that must define a minimum floor rate of return, with a 5-year minimum term and a 3-year lock-in. Swapping the two is the obvious trap in this section.
- The sum assured is a multiple of the annual premium, not a figure chosen independently of the premium.
- The death benefit has three possible forms and the policy decides. Do not assume "higher of" — it is one of three listed possibilities.
- Switching between funds is a feature of the ULIP, not of endowment or whole life. It is what makes asset allocation the policyholder's job.
- Top-ups are not pure investment. They are invested only after the mandatory assignment to risk cover.
- Maturity pays the fund value, full stop — no bonus, no sum assured. Money back policies, which do return a percentage of the sum assured at intervals, are a type of endowment, not a ULIP.
- A ULIP is not a mutual fund with a nominee. Insurance cover is deducted from every premium, which is why its return will trail a comparable fund even when the underlying fund performs identically.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Asset allocationThe decision on how to distribute a client's wealth across asset classes — the first decision in building a portfolio, and the one that explains most of what the portfolio then does.
- Endowment policyA life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.