Money Basics · Insurance done right

ULIPs, why they're usually a bad deal

ULIPs (Unit Linked Insurance Plans) combine life insurance with market-linked investment. Sounds ideal. In practice, they're one of the worst financial products sold to Indian retail investors.

How ULIPs work

You pay a premium. Part goes to life cover. Part goes into market-linked funds (equity, debt, or balanced). The rest goes to fees.

The problem: the fees.

The fee structure that kills returns

ULIPs have multiple overlapping charges:

• Premium allocation charge: 5–10% deducted upfront from your premium in early years
• Fund management charge: 1.35% annually (IRDAI cap, but still high)
• Mortality charge: cost of life cover, deducted monthly
• Policy administration charge: fixed monthly fee
• Surrender charge: if you exit before 5 years, you pay penalties

> In the first few years of a ULIP, only 60–80% of your premium actually gets invested. The rest goes to charges.

ULIP vs term + mutual fund (the better alternative)

• ULIP: ₹1 lakh/year premium → about ₹10 lakh life cover (IRDAI's minimum sum assured is 10x the annual premium) + market investment with high fees
• Term plan: ₹12,000/year → ₹1 crore cover. Remaining ₹88,000 → equity mutual fund.

The mutual fund investment of ₹88,000/year at the same market return will significantly outperform the ULIP over 20 years. Plus, your life cover and investment are now separate. You can modify either independently.

5 year lock-inMandatory surrender period for ULIPs (you can exit, but with charges)

When ULIPs might make sense

The tax case is narrower than the pitch suggests. As the rules stand in July 2026, maturity proceeds of a ULIP issued on or after 1 February 2021 are exempt only while your aggregate annual premium stays at or under ₹2.5 lakh; above that they are taxed as capital gains. So the exemption applies least to the high-premium buyer it is usually pitched to. And insurance tax treatment changes at almost every Budget. A 20-year product cannot sensibly be bought for the tax treatment it happens to have today.

Takeaway. ULIPs charge multiple overlapping fees that erode returns. A term plan + mutual fund gives better life cover and better investment returns separately. Don't mix insurance and investment.