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.
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.
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.