Types of Unit-Linked Insurance Plans (ULIP)

By Ronald Kimmons, eHow Contributor

Unit-linked insurance plans (ULIP) are types of insurance that offer a coverage, such as life insurance, with a certain type of investment. However, the policyholder makes this investment, and therefore, the risk of investment is his. The insurance company offers investment options, but the policyowner decides which investment option to use. This can be more profitable than a traditional insurance policy, but it also has a higher risk.

ULIP Life Insurance Type I
ULIP Type I is a life insurance policy linked to an investment account, usually called savings. When you purchase a ULIP Type I, you get an assured death benefit combined with an investment instrument. The amount you pay every month is a mixture of your monthly premiums, which pay for the death benefit, as well as a portion of money that you desire to invest. However, upon death, ULIP Type I only pays for one of these two amounts. Should you pass away, the insurance company looks at the death benefit for your policy and the amount of money you've accrued from your investments and pays you whichever is more, keeping the lesser amount of the two. At the point at which your investments have accrued to the same level as your death benefit, you can ask your company to raise the amount of money allotted to your death benefit. However, you usually must agree to new medical exams to do this.


ULIP Life Insurance Type II
ULIP Type II also links life insurance to investments. However, in this case, your monthly premiums are higher than they are with Type I. The reason for this is that, upon death, ULIP Type II pays your beneficiary both amounts: your death benefit amount and the sum of your investments at that point. Outside of this, Type II works very similarly to Type I, in that you still choose the funds for investment and you take the risk of loss. Because the investment aspect of a ULIP comes at a high level of risk, you shouldn't abandon your policy early on, as this results in almost no return on your investments.


Pension ULIPs
A third type of ULIP is the pension ULIP. As with the other types of ULIP, this is insurance that links two types of benefits: life insurance and retirement income. The part of this insurance that relates to life coverage is similar to Types I and II: Upon death, the company pays your beneficiary the death benefit that you purchased. However, the investment part of this type of ULIP is designed for retirement purposes. If you live to retirement age, a pension ULIP gives the premiums and accrued interest back to you in full. The money you're investing is exclusively an investment for retirement, but it's also linked to high risks. You can lose part or all of your funds, depending on economic fluctuations. For this reason, it's important not to abandon these plans before retirement age.