ULIPs provide a combination of risk cover and investment. More importantly they offer a flexibility to decide your risk taking profile. Insurance companies invest the investment amount in equity-related stocks or government security bonds.

A ULIP is made up of units and these are allocated depending on the Net Asset Value (NAV) of the investment fund. The following simple formula shows how the units are allocated:

Number of units = Investment amount / NAV of the ULIP fund
The returns in such plans depend upon the performance of the fund. Selection of the fund is at the discretion of the customer. Following are the choices of funds from which a customer selects:

Equity fund: Greater proportion of the allocation (~80%) is done in equity markets and related securities and lesser proportion (~20%) done in debt bonds or government securities or cash.

Debt fund: Greater proportion of the allocation (~80%) is done in debt bonds or government securities or cash whereas lesser proportion (~20%) done in equity markets and related securities.

Balancer fund: Usually the allocation in a balance fund is (50%-50%) in equity markets and related securities and in debt bonds or government securities or cash.

ULIPs are suitable for people who want to invest in a long term investment return-yielding investment option that offers a life cover for the policy holder and ~5-8% p.a. returns.