ULIPs - Advantages and Disadvantages

Unit Linked Insurance Plans (ULIPs) combine life insurance with market-linked investments, allowing you to grow your money while staying financially protected. They offer flexibility to switch funds and long-term growth potential but returns depend on market performance and may involve risk. Since the investment risk is borne by the policyholder, regular review and tracking become important over time. Understanding the ULIP benefits helps you make informed decisions.  In this article, we explore the advantages and disadvantages of ULIPs.

What is a unit linked insurance plan (ULIP)?

A Unit Linked Insurance Plan (ULIP) is a unique financial product that combines life insurance protection with investment opportunities in a single policy. Unlike traditional insurance plans that offer fixed returns, ULIPs allocate a portion of your premium toward life cover while investing the remaining amount in market-linked funds such as equity, debt, or balanced portfolios. This dual-benefit structure of a ULIP plan allows you to build wealth while securing your family's financial future. The fund value grows based on the Net Asset Value (NAV) of your chosen funds, offering flexibility and potential for higher returns compared to conventional insurance products.

What are the different features of a ULIP?

The following are the features of the ULIP plan:
 

Life insurance coverage

A ULIP combines the benefits of risk protection through life insurance with investments. It covers your family in case of eventualities, hence a way of securing them while money grows over a period.
 

Market-linked returns

Returns in ULIPs are based on the performance of the market; if the chosen fund performs well, your investment grows. It offers growth potential, though results can vary with market conditions.
 

Partial withdrawals

You can withdraw part of the ULIP investment after the lock-in period. This offers flexibility towards short-term financial requirements without affecting the remaining amount that is invested.
 

Switch option

ULIPs allow you to shift your investment between equity, debt, or balanced funds. This flexibility can help you adjust your portfolio according to changing market conditions or shifting financial goals.
 

Tax benefits

The premiums paid towards a ULIP are also entitled to tax* deduction, while maturity proceeds may be tax-free* under certain conditions. It is a tax-efficient way of saving and investment.
 

Lock-in period

ULIPs have a five-year lock-in period that ensures disciplined investing. Your funds grow steadily in this period, which assists in long-term planning rather than short-term withdrawals.
 

Loyalty additions

Some ULIPs provide loyalty additions, wherein extra units are added after a certain period of time. This increases the overall fund value, as long-term commitment and consistent investing over time are rewarded.
 

Fund options

One of the ULIP plan benefits is that you have a variety of fund options to choose from; hence, you will be able to select those investments that best fit your risk tolerance and financial goals. You can change the portfolio composition to keep it in line with your strategy.

What are the advantages of ULIPs

Here are some benefits of ULIP:
 

Offers more returns

As investments in ULIPs are linked with market funds, they can also provide better returns if market conditions are favourable. Moreover, they can be a good long-term investment tool even with the life insurance component.
 

Rider options

Most ULIP plans come equipped with add-on options such as critical illness or accidental death coverage, providing an additional layer of financial protection for yourself and your family. Such add-ons increase the scope of the plan as individuals don’t need to buy separate plans for different needs.
 

Switching option

ULIPs provide the flexibility to switch your investments between equity, debt, or balanced funds as needed. This feature helps you adjust your portfolio according to market performance or changing financial goals, keeping your investments aligned with your risk tolerance and long-term strategy.
 

Provides you with tax benefits

ULIPs also offer tax* benefits. Premiums paid are eligible for deductions of up to ₹1.5 lakh under Section 80C, and the death benefit paid to nominees is fully tax-free*. This makes ULIPs a tax-efficient way to invest while maintaining life insurance coverage.
 

Offers flexibility

In addition to switching funds, ULIPs are flexible in terms of investment allocation and policy features. You can adjust your contributions, select suitable riders, or modify fund choices as your financial priorities change over time.

What are the disadvantages of ULIPs

Here are some disadvantages of a ULIP:
 

• Subject to market risk

  Your funds are invested in the stock market and are therefore subject to market volatility. Your returns depend on market performance and may result in either a gain or a significant loss.
  

• Costlier than other insurance plans

  As compared to other insurance plans, such as term insurance, whole life insurance, etc.,  which are pure protection plans, a ULIP can be more expensive as it includes protection with wealth creation. So, this may not suit individuals with a limited budget.
  

• Fixed lock-in period

  The fixed lock-in period for a ULIP is 5 years. During this period, you cannot assess or withdraw your money.
   

• High costs and charges

  ULIPs include multiple fees such as premium allocation, policy administration, and fund management charges, especially higher in the early years, which can reduce your overall returns.
   

• Market risk and no guaranteed returns

  Since ULIPs are linked to market performance, returns are not guaranteed and can fluctuate based on market volatility, leading to potential losses.
   

• Five-year lock-in period

  ULIPs come with a mandatory 5-year lock-in period during which withdrawals are not allowed, limiting liquidity for short-term needs.
   

• Lower returns compared to mutual funds

  Due to higher charges and their dual structure of insurance plus investment, ULIPs typically offer lower returns than standalone mutual fund investments.
   

• Lower life cover

  A significant portion of your premium goes toward investment, resulting in lower life insurance coverage compared to pure protection plans like term insurance.
   

Are ULIPs a good investment?

ULIPs are investment options that combine life insurance with market-linked¹ growth, which makes them different from traditional plans. Compared to traditional plans, ULIPs provide life cover along with potential returns that may be higher due to equity exposure. ULIPs also include a lock-in period of five years, encouraging disciplined investing and long-term financial planning. Additionally, tax* benefits under Section 80C and exemptions on maturity proceeds under Section 10(10D) further enhance their suitability for long-term financial goals.

However, ULIP returns are linked to market performance and may fluctuate over time. ULIPs may suit investors seeking long-term growth while securing life cover. However, understanding fund allocation, risk level, and policy terms is important before investing.
 

How is ULIP different from FD (fixed deposit)?

A fixed deposit provides fixed interest income for a chosen tenure. It is a low-risk option but does not provide life insurance. On the other hand, a ULIP combines insurance and investment. You receive life cover while also investing in market-linked¹ funds. Unlike FDs, ULIPs offer the flexibility to switch between different fund options, such as equity and debt. ULIPs also offer tax* deductions on premiums under Section 80C and tax-free maturity proceeds under Section 10(10D). Besides this, you don’t pay GST on ULIP premiums for individual life insurance policies.

FDs only provide tax exemption on the invested amount, while the interest is taxable. The returns from FDs remain fixed and predictable, whereas ULIP payouts vary based on market performance. FDs may suit individuals looking for assured income and stability, while ULIPs provide an option that combines long-term investment growth with life insurance protection.
 

What is the death claim payable in case of ULIP?

In a ULIP, the death benefit is the amount paid to the nominee if the policyholder passes away during the policy term. The nominee will receive either the sum assured or the fund value, whichever is higher. Even if the fund underperforms and its value is lower than the sum assured, the insurer will still pay the full sum assured to the nominee.
 

When is the right time to invest in ULIP?

You should consider the following factors before planning to invest in a ULIP:
 

• Optimal timing:

  The right time to start ULIP investment is when you have a steady income and can commit to long-term premiums. Starting early may also help you benefit from the ‘Power of Compounding’.

• Age and life stage:

  At a younger age, you may prefer equity-oriented funds for potential growth. As you approach retirement, shifting towards debt-oriented funds may provide stability.

• Impact of market conditions:

  Although market fluctuations affect ULIP performance, it’s better to focus on long-term goals rather than short-term movements. Even in a down trending market, continuing with ULIP may support disciplined investing.

• Align with your financial goals:

  ULIP may be suitable when your financial goals align with the policy tenure. Whether it is for education, retirement planning, or asset building, aligning goals with the ULIP lock-in period is important.

Conclusion

ULIPs combine life insurance protection and investment opportunities, offering a dual benefit within a single plan. It provides flexibility through fund switching, partial withdrawals, and different fund options. The lock-in period also encourages disciplined long-term investing. At the same time, ULIPs involve costs and market-related risks that must be carefully assessed. Understanding ULIP advantages and disadvantages and aligning it with your financial objectives can help you decide whether it suits your long-term strategy.