What are Type 1 ULIP and Type 2 ULIP Plans?

type 1 ulip and type 2 ulip

Unit Linked Insurance Plan (ULIP) is one of the best policies for individuals looking to get both insurance and investment with a single premium. However, it can be of two types, type 1 and type 2. The main difference between type 1 and type 2 ULIP plans is the amount and nature of return. 

Keep reading to get a clear idea about each so that you can select the best one according to your financial goals.

What Is Type 1 ULIP?

In case of a Type 1 ULIP plan, a beneficiary can receive either insurance or investment upon the death of the policyholder. The insurer hands them the investment or insurance amount, whichever is higher.

What Is Type 2 ULIP?

For Type 2 ULIP plan, your nominee will get both investment and insurance money after your unfortunate demise. Thus, the return tends to be higher than Type 1 ULIP.

There are some marked differences between the returns of these two types that you should understand properly to make the right choice.

What Are the Differences Between Type 1 and Type 2 ULIP Plans ?

The differences between type 1 and type 2 ULIP plans are as follows:

Point of Comparison

Type 1

Type 2

Benefit

Your nominee can get either the insurance or investment amount, whichever is higher.

Your nominee can get both the investment and insurance upon your demise.

Impact on Return

The returns are lower compared to Type 2 ULIP plans.

The returns are higher compared to the Type 1 ULIP plans.

Example

If the investment amount is ₹ 2 Lakhs and insurance amount is ₹ 3 Lakhs, your nominee will get the insurance money only.

If the investment amount is ₹ 2 Lakhs and insurance amount is ₹ 3 Lakhs, your nominee will get both the insurance and investment amounts.

Returns Calculation

From the above example, your beneficiary can get ₹ 3 Lakhs upon your death.

Considering the above example, your nominee can get ₹ 5 Lakhs upon raising a claim.
However, the premiums for Type 2 plans are slightly higher than Type 1, considering their returns. Additionally, there are several other advantages of purchasing a ULIP that you can benefit from immensely.

What Are the Advantages of Investing in ULIPs?

The advantages of investing in ULIPs are as follows:

  • Substantial Coverage: Your family can get substantial funds that they can use to support their future goals. Also, your family members will not have to compromise on their current lifestyle. Additionally, they can quickly settle any pending loan without having to turn to others for financial assistance.
  • Finance for Long-Term Goals: The investments from ULIP can immensely help in wealth creation. This accounts for an extra income for you and your family that you can use to meet expenses. Also, you can withdraw money from your investments to meet monetary urgencies or fulfill financial goals.
  • Ease of Switching Between Portfolios: You can easily switch between the funds to stay ahead of fluctuations in the money markets. This ensures that you can increase your profits and minimize your losses. Also, several insurers allow this switching for free. Owing to these advantages, you can proceed to invest in ULIP by following some hassle-free steps.

How to Invest in ULIPs?

You can follow the steps below to invest in ULIP:

Step 1: Compare various plans available in the market.

Step 2: Go through the features and terms and conditions of the policy.

Step 3: Select the right plan for you.

Step 4: Fill in the application form.

Step 5: Pay the premium online to purchase your policy.

Now that you have a clear idea regarding the type 1 and type 2 ULIP plans, you can select the one that suits your financial goals. You can go for type 1 ULIP if you want adequate coverage at lower premiums. 

However, you can select type 2 ULIP if you want substantial coverage, even at the cost of higher premiums.

FAQs on Things You Should Know About Type 1 ULIP and Type 2 ULIP :

How can you maximise your returns from ULIP?

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You can maximise your returns from ULIP by following the strategies below:

  • Invest in your ULIP funds for about 10 to 15 years for maximum returns.
  • Switch between equity and debt funds accordingly for better returns.
  • Avail tax benefits on the premiums of ULIP for maximising your savings and returns.

Can you get a tax benefit on ULIP premiums?

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Yes, you can get a tax benefit of up to ₹ 1.5 Lakhs on the premiums of both types of ULIP plans under Section 80C of the Income Tax Act. Additionally, you can also get a tax deduction on the claim amount under Section 10D.

What is the minimum lock-in period of ULIP?

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The minimum lock-in period is five years for both type 1 and type 2 ULIP plans.

What should you keep in mind before investing in ULIP?

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You should keep the following pointers in mind before investing in ULIP:

  • Compare the available ULIP plans stringently to select the most affordable one.
  • You can opt for ULIP if your financial goal involves wealth creation.
  • You will have to pay additional charges if you plan on withdrawing your funds before the lock-in period.
  • It involves elevated risks if the money is invested in equity funds, which are highly volatile and fluctuate with the money market.

What are the types of funds available for investment in ULIP?

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The different funds available for investment in ULIP are as follows:

  • Equity Funds: A part of the premium is invested in mutual funds. Since they are highly volatile, the risk associated is high.
  • Debt Funds: The money is invested in government and corporate bonds. Since they are not very volatile, the risk associated is low.
  • Balanced Funds: In this type, the money is partly invested in equity funds and partly in a debt fund to keep the risk in check and maximise your income.

Disclaimer

  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.