Unit Linked Insurance Plan: What It Is, How It Works

Unit Linked Insurance Plan

Investopedia / Michela Buttignol

What Is a Unit Linked Insurance Plan (ULIP)?

A unit linked insurance plan (ULIP) is a multi-faceted product that offers both insurance coverage and investment exposure in equities or bonds. This product requires policyholders to make regular premium payments. Part of the premiums goes toward insurance coverage, while the remaining portion is pooled with assets from other policyholders and invested in either equities, bonds, or a combination of both.

Key Takeaways

  • A unit linked insurance plan is a product that offers a combination of insurance and investment payout.
  • ULIP policyholders must make regular premium payments, which cover both the insurance coverage and the investment.
  • ULIPs are frequently used to provide a range of payouts to their beneficiaries following their death.

Understanding Unit Linked Insurance Plans (ULIPs)

A unit linked insurance plan can be used for various purposes, including providing life insurance, building wealth, generating retirement income, and paying for the educations of children and grandchildren. In many cases, an investor opens a ULIP to provide benefits to their descendants. With a life insurance ULIP, the beneficiaries would receive payments following the owner’s death.

A unit linked insurance plan’s investment options are structured much like mutual funds, in that they pool investments with those from other investors. As such, a ULIP's assets are managed with an eye toward accomplishing a specified investment objective. Investors can buy shares in a single strategy or diversify their investments across multiple market-linked ULIP funds.

Investing in a Unit Linked Insurance Plan

Policyholders must commit an initial lump-sum payment when they first buy into a ULIP, followed by annual, semi-annual, or monthly premium payments. Although the premium payment obligations vary from product to product, in all cases, they are proportionally directed towards a designated investment mandate.

The regular premium payments enable policyholders to systematically build up principal more quickly than could be accomplished by waiting for returns to accumulate. In addition, many ULIPs offer the option of "topping up", or adding significant lump sums to the balance.


Even though ULIPs are partly an insurance product, a focus on exposure to equities in the investment side of the product can raise investor risk.

ULIPs are unique in that they offer flexibility to investors, who may adjust their fund preferences throughout the duration of their investment. For example, they can shuttle between stock funds, bond funds, and diversified funds depending on their investment needs.