What are ULIP Plans? Investment and life insurance together

How about if you get insurance along with capital increase on the amount you have invested. ULIP plan gives you the facility of insurance along with investment. A ULIP scheme is a plan offered by an insurance company that works towards achieving your financial goals. There are currently hundreds of ULIP Schemes, which you can choose according to your needs and goals

Friends, if you are also thinking of investing in ULIP plan, then you are on the right article. Today you will get the answer of all the questions related to your ULIP through this article.


What are ULIP Plans?

These are mainly products available in India. The first ULIP in India was offered by UTI.

ULIP Meaning in Hindi – The full form of ULIP is Unit Linked Insurance Plan. ULIP has two terms first unit linked. Your main investment remains in this. You can think of it like a mutual fund investment. It consists of units and the price of that unit is decided on the basis of NAV. The investments made by you are invested in the stock market and bonds.

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The second term is the insurance plan. In this, out of the investment made by you, some amount goes towards your insurance. This investment gives you the protection of life insurance.

In this way, along with investment in ULIP, the facility of life insurance is also available.

ULIP Plan Key Features (In Brief)

  • It provides you the facility of life insurance along with investment.
  • The premium of ULIP can be used for tax exemption and its maturity is tax free.
  • Fund switch facility is available.
  • It can be helpful in achieving your long term goals like getting a house, education of children, buying a car etc.
  • It also provides exposure to the stock market to your investments.

How do ULIPs work?

Whenever premium goes to your ULIP plan, all ULIP charges and your insurance related money are deducted from it and the remaining amount is invested. In this, units are allotted on the basis of current NAV on your invested amount.


Let's say your ULIP premium is ₹10,000. Out of this, after deducting ₹ 500 ULIP charges, the remaining ₹ 9,500 has been invested. If the current NAV of this fund is ₹95 then you will get 9500/95 = 100 units for this ULIP plan.

What are the investment options in ULIP?

Your premium amount can be invested in three ways in a ULIP plan.

1. Equity Funds – If you can take more risk as an investor, then you can invest in equity. In equities, the investor's entire money is invested in the stock market.

Equity funds work on the formula of high risk and high return. If you are a young investor then equity funds can be a good option for you.

2. Debt Funds – In a ULIP plan, you have the option to invest your premium in debt funds as well. Debt funds come with a fixed interest rate, so they carry very little risk.

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Due to low risk, they also have less ability to give returns. Their returns are less as compared to equity. Investors who are older can choose debt funds.

3. Balanced Funds – Balanced Fund is a combination of Equity Funds and Debt Funds. In this, the investor can build a balanced portfolio by taking exposure of both.

What is the lock-in-period in ULIP?

Most of the ULIP policies come with a lock-in-period of 5 years. Before 2010, this period was only 3 years. But in 2010, IRDA increased the lock-in-period to 5 years.

What happens if the ULIP is closed before the lock-in-period is over?

If you want, you can close your ULIP policy before the end of 5 years. By doing this your fund will go to Discontinue Fund (DP). On premature closure, the amount deposited in your account will be paid interest at the rate of 4% only. These rates are as per the guidelines of IRDA, changes are possible.

The most important thing is that even after closing the ULIP plan 5 years ago, you can withdraw your amount only after the end of 5 years.

ULIP Tax Benefits

Good tax benefits are available in ULIP plan. Capital gains tax is levied in mutual funds but no capital gains tax is payable in ULIPs.

  • Premium paid in ULIP is exempt under section 80(c) of Income Tax. In this, you can get a discount on investment up to ₹ 1,50,000.
  • The amount of ULIP on maturity is completely tax free under section 10(10D) of Income Tax. But to avail the discount on maturity, your premium amount should be less than 10% of the sum assured.

Thus there are two tax benefits available to you in a ULIP plan.

In Budget 2021, the Finance Minister has brought an amendment to bring in tax parity that capital gains on maturity on payment of premium of more than ₹ 2.50 lakh in a financial year will be taxable. But there is still a lack of clear guidelines on this change.

ULIP Plans – Risk and Return

Since your deposits in ULIPs are invested in the stock market and bonds, your overall return depends on their performance. The stock market can be very volatile, hence the risk is high.

You can check the past returns of some ULIP schemes here –

Can I switch plans in ULIP?

Fund switch option is also available in ULIP. If at any point of time you feel that your fund is not performing well, then you can switch to another fund of the same ULIP company. If you want to go under the ULIP scheme of any other company, then in this situation you will have to surrender your plan.

Many ULIPs give you the facility of unlimited switches. But some companies keep a fixed limit of free switch. Exercising the switch option more than this limit may result in a charge ranging from ₹ 50 to ₹ 300.

ULIP Plan Charges

There are many charges in this scheme which are collected from the investor.

1. Fund Management Charges – Fund Management Charges are levied by insurance companies for managing ULIP funds. You can think of this as the expense ratio of a mutual fund. This fee can be maximum 1.35% of the fund value per annum.

2. Fund Switch Charges – Some companies provide free fund switch facility while some companies charge fee for the switch. It depends from fund to fund.

3. Premium Allocation Charge – This is the front load charge deducted from the premium of the investor.

4. Partial Withdrawal Charge – Some ULIP plans offer free unlimited withdrawal facility while some charge investors for it.

5. Mortality Charge – Mortality charge is charged to the ULIP account holder by the insurer to provide insurance cover for his death. Mortality charge is calculated by a certain formula. Mortality charge is less for younger people while it is higher for older people.

6. Policy Administration Charges – This charge Policy Admn. As each month some of your units are reduced and deducted. This charge can be at a fixed rate or as a percentage of your premium.

How much life insurance is received from ULIP?

As you know ULIP is an investment cum insurance plan. Your life cover (sum assured) will be 10 times your annual premium as per IRDA guidelines. Therefore, insurance cover is offered by most of the insurance companies at least 10 times the annual premium.

For example, if you have made an annual deposit of ₹60,000 in a ULIP plan, then you will get an insurance cover of at least ₹6,00,000.

Sum Assured is the amount that is received by the nominee on the death of the account holder as life insurance amount.


Can Partial Withdrawal be done in ULIP?

Most ULIP plans do not offer the option of partial withdrawal before 5 years. Some ULIP plans do offer the option of partial withdrawal after 3 years but a fee is charged for such partial withdrawals.

You can do partial withdrawal after the lock-in period of 5 years. Some plans come with the facility of unlimited partial withdrawal and some with fixed.

Nominee facility

Nominee facility is available in ULIP plan. You have to decide this while taking a ULIP plan. In the event of the death of the account holder, the nominee is entitled to the entire sum assured and benefits.

Where to buy ULIP?

If you have made up your mind to buy ULIP or are thinking of buying, then you can buy ULIP directly from the website of any insurance company. If you want, you can also invest in a ULIP plan through an agent.

Conclusion – Should I Invest in ULIP?

If your main objective is to save tax as well as take life insurance then you can invest in ULIP. If you have taken a term plan then in my opinion investing in ULIP will not be beneficial for you. If you have taken a term plan then you can definitely go for Mutual Funds instead of ULIPs.

In a term plan, you get a very high sum assured at a low premium. Whereas in ULIP, you have to compromise on the returns on account of life insurance (due to additional charges).

Today you understood what is ULIP plan, ULIP meaning. If you have any question related to this then you can ask us through comment box.

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Disclaimer- This article is not an investment advice, do research properly or consult your financial advisor before investing anything.