Through their flexible features the plans can be structured according to an individual’s specific needs and risk appetite. A unit-linked plan works on a minimum premium basis and not on a sum assured one. You decide the amount you can contribute at regular intervals. The insurance cover is a multiple of the premiums paid. You also have the choice of a higher or lower cover. If you choose a lower cover, risk expenses deducted are lower and, hence, your savings component higher.

What are Unit-Linked Insurance Plans?
a)  Unit-linked insurance plans, ULIPs, are distinct from the more familiar ‘with profits’ policies sold for decades by the      Life Insurance Corporation.
b)  ‘With profits’ policies are called so because investment gains (profits) are distributed to policyholders in the form of      a bonus announced every year.
c)  ULIPs also serve the same function of providing insurance protection against death and provision of long-term      savings, but they are structured differently.
d)  In ‘with profits’ policies, the insurance company credits the premium to a common pool called the ‘life fund,’ after     setting aside funds for the risk premium on life insurance and management expenses.
e)  Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The surplus in the      life fund left after meeting these liabilities is credited to policyholders’ accounts in the form of a bonus.
f)   In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration charges and      fund management charges.
g)  The rest of the premium is used to invest in a fund that invests money in stocks or bonds.
h)  The policyholder’s share in the fund is represented by the number of units.
i)   The value of the unit is determined by the total value of all the investments made by the fund divided by the number      of units.
j)   If the insurance company offers a range of funds, the insured can direct the company to invest in the fund of his      choice. Insurers usually offer three choices — an equity (growth) fund, balanced fund and a fund which invests in      bonds.

Which is better, unit-linked or ‘with profits’?
a)  The two strong arguments in favour of unit-linked plans are that — the investor knows exactly what is happening to      his money and two, it allows the investor to choose the assets into which he wants his funds invested.
b)  A traditional ‘with profits,’ on the other hand, is a black box and a policyholder has little knowledge of what is      happening. An investor in a ULIP knows how much he is paying towards mortality, management and      administration charges.
c)   He also knows where the insurance company has invested the money. The investor gets exactly the same returns      that the fund earns, but he also bears the investment risk

Are unit-linked insurance plans good?
a)  Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-linked life insurance      products are those where the benefits are expressed in terms of number of units and unit price. They can be      viewed as a combination of insurance and mutual funds.
b)  The number of units that a customer would get would depend on the unit price when he pays his premium. The      daily unit price is based on the market value of the underlying assets (equities, bonds, government securities, et      cetera) and computed from the net asset value.
c)   The advantage of unit-linked plans is that they are simple, clear, and easy to understand. Being transparent the       policyholder gets the entire upside on the performance of his fund. Besides all the advantages they offer to the       customers, unit-linked plans also lead to an efficient utilisation of capital.
d)   Unit-linked products are exempted from tax and they provide life insurance. Investors welcome these products as      they provide capital appreciation even as the yields on government securities have fallen below 6 per cent, which      has made the insurers slash payouts.
e)   According to the IRDA, a company offering unit-linked plans must give the investor an option to choose among      debt, balanced and equity funds. If you opt for a unit-linked endowment policy, you can choose to invest your      premiums in debt, balanced or equity plans.
f)   If you choose a debt plan, the majority of your premiums will get invested in debt securities like gilts and bonds. If     you choose equity, then a major portion of your premiums will be invested in the equity market. The plan you     choose would depend on your risk profile and your investment need.
g)  The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is especially so if      one also believes that current market values (stock valuations) are relatively low.
h)   So if you are opting for a plan that invests primarily in equity, the buzzing market could lead to windfall returns.      However, should the buzz die down, investors could be left stung.
i)   If one invests in a unit-linked pension plan early on, say when one is 25, one can afford to take the risk associated      with equities, at least in the plan's initial stages. However, as one approaches retirement the quantum of returns     should be subordinated to capital preservation. At this stage, investing in a plan that has an equity tilt may not be a     good idea.
j)  Considering that unit-linked plans are relatively new launches, their short history does not permit an assessment of     how they will perform in different phases of the stock market. Even if one views insurance as a long-term     commitment, investments based on performance over such a short time span may not be appropriate
k)  Ever since the insurance sector was opened up, private players have been trying to entice the Indian customer with     new and innovative policies. But is the customer ready for innovations--such as unit-linked plans? These plans are     popular in developed and other developing markets, but India has so far had only one such product from LIC. Stuart.