Unit Linked Insurance Plan (ULIP) is a financial product that provides insurance as well as investment. An investor is required to pay premium for a specified period like any other insurance policy. Insurers allow premium payment yearly, half-yearly or monthly and this amount (premium) is divided between the insurance cover and investment.
The investments through a ULIP are subject to market risks as they are linked to the capital market in the form of stocks and bonds. These plans offer flexibility in the choice of investment. Based on your risk appetite, you can select the type of investment you want to make and, like MFs, these plans too offer pure equity, pure debt and equity-debt mix options. After initial investment, if you change your mind and want to switch between funds, ULIP providers allow that too. Many of the ULIPs today generate returns at par with their MF peers. Note that a minimum lock-in of five years is required. And, since ULIPs are investment products with insurance cover, the maturity proceeds are exempt from tax. Similarly, you get to claim tax deduction for the premium paid towards your ULIPs under Section 80C.
However, it should be noted that there are premium allocation and fund management charges that will be deducted from your premium before the units are allotted to you. Understand these charges before you opt for a ULIP. There are many online ULIPs too today, where charges are minimal.