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Q: How should I evaluate a ULIP before buying?

Before buying a ULIP, review its charges , fund options, life cover, lock-in period, and tax implications. Pay close attention to costs such as premium allocation, mortality, and fund management charges, as these can significantly affect returns over time. You should also compare the ULIP with alternatives like a term insurance plan combined with mutual funds. Consider whether the life cover is adequate, whether the lock-in period suits your needs, and whether the tax benefits justify the additional complexity. A long-term investment horizon is essential for ULIPs.

Overview

Popular ULIPs (Unit Linked Insurance plans) combine life insurance and market-linked investments into a single product. When you pay a premium, a portion goes toward life cover, and the remainder is invested in equity, debt, or hybrid funds, depending on the plan you choose.

Although ULIPs offer tax benefits and the convenience of combining insurance with investing, they also come with a mandatory 5-year lock-in period, multiple charges, and returns that depend on market performance. In many cases, the life cover provided is insufficient to meet a family's protection needs.

At Ditto, we believe most people are better off buying a term insurance plan for adequate coverage and investing separately through options such as the Public Provident Fund (PPF), Fixed Deposits (FDs), or mutual funds. However, certain low-cost ULIPs may suit investors seeking long-term tax efficiency and disciplined investing.

Many people want two things from their money: financial protection for their family and long-term wealth creation. That's why ULIPs, which combine insurance and investing in a single product, continue to attract attention.

However, choosing one is not as straightforward as it may seem. Costs, withdrawal restrictions, tax rules, and the amount of protection offered can significantly affect whether a ULIP is a good fit for your needs.

This guide is ideal for anyone considering a ULIP and wanting to understand how it works before investing. We'll review some of the most popular ULIP plans in India, explain the costs involved, compare ULIPs with alternative strategies, and help you determine whether a ULIP is the right fit for your financial goals.

What Is a ULIP Plan and How Does It Work?

A Unit Linked Insurance Plan (ULIP) is a product that combines life insurance with market-linked investing. When you pay a premium, a portion goes toward providing life cover, while the remainder is invested in funds you choose, such as equity, debt, or hybrid funds.

The money allocated toward investments is used to purchase units of the selected fund at its current Net Asset Value (NAV), which represents the per-unit value of the fund's underlying investments. As market conditions change, the NAV rises or falls, causing the value of your investment to increase or decrease accordingly.

Most ULIPs offer features such as fund switching, partial withdrawals after the 5-year lock-in period, and optional riders for additional protection. They also provide tax benefits subject to prevailing tax laws.

However, before your money is invested, insurers may deduct costs such as fund management, mortality, and policy administration charges. These costs can affect your overall returns, which is why understanding a ULIP's charge structure is just as important as evaluating its investment potential.

Popular ULIP Plans in India

ULIP Plan	Insurer	Key Highlights
HDFC Life Click 2 Wealth	HDFC Life	Multiple fund options, unlimited fund switching, and loyalty benefits
ICICI Pru Signature Assure	ICICI Prudential	Market-linked growth with flexible investment strategies
Axis Max Life Fast Track Super	Axis Max Life	Multiple portfolio strategies and extensive fund choices
Bajaj Goal Assure IV	Bajaj Life	Return of mortality charges, loyalty additions, and fund boosters
LIC Index Plus	LIC	Index-linked investing with guaranteed additions

It's important to remember that a popular ULIP is not necessarily the right ULIP for you. Instead of focusing only on past performance or brand reputation, evaluate factors such as charges, life cover, lock-in requirements, fund options, and tax implications.

Among HDFC ULIP plans, HDFC Life Click 2 Wealth is a popular choice due to its multiple fund options and fund-switching flexibility. For investors exploring SBI ULIP plans, SBI Life eWealth Plus is a widely known online ULIP. Among LIC ULIP plans, LIC Index Plus stands out for its index-linked investment approach and guaranteed additions.

At Ditto, we do not rank or recommend ULIPs. The right choice for life coverage depends on whether the product aligns with your financial goals, investment horizon, and insurance needs. Before investing, compare the plan against a term insurance plus mutual fund strategy, which remains the more suitable option for most investors.

Key Charges in a ULIP

Premium Allocation Charge: This charge is deducted from your premium before any money is invested. For example, if you pay a ₹1 lakh premium and the allocation charge is 5%, only ₹95,000 is invested. These charges are usually higher in the initial policy years.
Policy Administration Charge (PAC): A fee for administering and maintaining the policy. It is deducted every month by canceling units from your fund value.
Fund Management Charge (FMC): The FMC is charged for managing the underlying investment fund. It is capped at 1.35% per year by IRDAI and is built into the fund's NAV, reducing your returns over time.
Mortality Charge: This is the cost of the life insurance component within the ULIP. It varies based on factors such as age, health, and the sum assured.
Surrender and Switching Charges: Certain ULIPs levy charges if you surrender the policy early or exceed the plan's free fund-switching limit.

Ditto's Take: Charges may seem small individually, but together they can meaningfully reduce long-term returns. This is one of the key reasons many investors prefer a combination of term insurance and low-cost mutual funds instead of a ULIP.

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ULIP vs Term Insurance + Mutual Fund: Which Is Better?

From an Investment Perspective: When you invest in a mutual fund, almost your entire investment amount starts working for you immediately, apart from a small expense ratio charged by the fund house.

With a ULIP, however, a portion of your premium is used to cover charges such as premium allocation, policy administration, and mortality costs before the remaining amount is invested. As a result, less money is invested from day one, which can affect long-term wealth creation.

From an Insurance Perspective: If your primary goal is to protect your family financially, term insurance is generally the better option. A term plan can provide substantial life cover at a relatively affordable premium.

For example, the annual premium for a ₹2 crore term insurance policy until age 65 may look something like this:

Profile	Axis Max Life Smart Term Plan Plus	HDFC Life Click 2 Protect Supreme Plus	ICICI Prudential iProtect Smart Plus
25-Year-Old Male	₹17,222	₹19,719	₹16,111
25-Year-Old Female	₹14,640	₹16,761	₹13,694
30-Year-Old Male	₹20,656	₹25,153	₹19,283
30-Year-Old Female	₹17,558	₹21,380	₹16,391
35-Year-Old Male	₹26,552	₹31,118	₹26,030
35-Year-Old Female	₹22,570	₹26,451	₹22,126

Note: These premiums are indicative and may vary based on age, health, lifestyle, underwriting decisions, and policy features.

In contrast, the life cover offered under most ULIPs is linked to the annual premium. If you invest ₹1 lakh annually, the sum assured may be around 7 to 10 times the premium, translating to a cover of roughly ₹7 lakh to ₹10 lakh. For most families, this is unlikely to provide adequate financial protection.

As a rule of thumb, many financial experts recommend life cover of at least 10 to 15 times your annual income, which often translates to a cover of ₹1 crore to ₹2 crore or more for salaried individuals. If you're unsure how much coverage your family needs, you can use Ditto's cover calculator to arrive at a personalized estimate before purchasing any life insurance product.

When Should You Consider a ULIP?

You've Exhausted Other Tax-Efficient Options: A ULIP does not provide an additional tax deduction beyond the existing ₹1.5 lakh limit under Section 80C. ULIP premiums share the same deduction bucket as investments such as Public Provident Fund (PPF), Employees' Provident Fund (EPF), Equity Linked Savings Scheme (ELSS), and life insurance premiums under the old tax regime.

The tax advantage lies in tax-free maturity proceeds for eligible policies where the aggregate annual premium across all ULIPs does not exceed ₹2.5 lakh, along with tax-free switching between equity and debt funds within the ULIP, allowing portfolio rebalancing without triggering capital gains tax.
You Value Tax-Free Fund Switching: One of the unique advantages of ULIPs is the ability to switch between equity and debt funds without triggering capital gains tax. This can be useful for investors who want to gradually reduce risk as they approach a financial goal.
You Need Investing Discipline: Some investors stop SIPs or redeem investments during market downturns. In such cases, the 5-year lock-in period can act as a reminder to stay invested and focus on long-term goals.
You're Considering a Low-Cost Online ULIP: Modern online ULIPs are often more cost-efficient than older versions. Some plans have zero premium allocation charges, offer a return of mortality charges at maturity, and keep fund management charges within regulatory limits. While they are still more expensive than many investment-only products, the gap has narrowed considerably.
You Have a Long Investment Horizon: ULIPs are generally better suited for investors with a horizon of 15 years or more. A longer holding period gives the investment component more time to potentially benefit from compounding and reduces the relative impact of early-year charges.

When Should You Avoid a ULIP?

For many investors, a ULIP may not be the most efficient way to meet their insurance and investment goals. Here are some situations where you may be better off avoiding one.

You Need Adequate Life Insurance Coverage: Most ULIPs offer life cover of around 10 times the annual premium. For example, if you invest ₹1 lakh per year, your sum assured may be around ₹10 lakh. For many families, this may not provide enough financial protection. Before buying a ULIP, use Ditto's cover calculator to estimate how much life cover your family may actually need.
You Need Flexibility and Liquidity: Life is unpredictable. Job loss, medical emergencies, or changing financial priorities may require access to your money. Since ULIPs have a mandatory 5-year lock-in period, exiting early can be costly. In many cases, surrendering before five years means your money is moved to a discontinued policy fund and becomes accessible only after the lock-in period ends.
You Prefer Greater Investment Freedom: With a ULIP, you're limited to the funds offered by a single insurer. If those funds consistently underperform, your options are restricted to switching within the insurer's fund lineup or surrendering the policy. Mutual funds offer significantly more flexibility, allowing investors to switch fund managers, strategies, or asset classes with greater ease.
You Already Invest in a Disciplined Manner: If you're comfortable staying invested through market ups and downs and don't need a lock-in period to remain disciplined, a combination of term insurance and low-cost mutual funds will often be a simpler and more flexible solution.

Why Choose Ditto for Life Insurance?

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Ditto’s Take

ULIPs have improved over the years, but they still aren't the ideal solution for most investors. Combining insurance and investing in a single product often leads to compromises on both fronts. You may end up with lower life cover than your family needs and returns that are affected by multiple charges and restrictions.

That said, a ULIP can be considered in certain situations. It may make sense if you already have adequate term insurance, are looking for tax-efficient switching between equity and debt funds, qualify for tax-free maturity benefits, and have a long-term horizon of 15 years or more.

Some modern ULIPs also offer features such as lower charges, loyalty additions, and return of mortality charges. While these improvements make them more competitive than older ULIPs, they do not eliminate the need to evaluate the product carefully.

Frequently Asked Questions

What is a ULIP plan and how does it work?

A ULIP (Unit Linked Insurance Plan) combines life insurance with market-linked investing. When you pay a premium, a portion goes toward providing life cover, while the remainder is invested in equity, debt, or hybrid funds you select. The investment portion is allocated units based on the fund's Net Asset Value (NAV), and your returns depend on how those funds perform. ULIPs also offer features such as fund switching, partial withdrawals after the lock-in period, and tax benefits subject to prevailing laws. However, they come with a mandatory 5-year lock-in period and multiple charges.

What charges can reduce returns in a ULIP?

ULIPs involve several charges that can affect long-term returns. These may include premium allocation charges, fund management charges, mortality charges for life cover, policy administration charges, and surrender charges. While many modern online ULIPs have reduced or eliminated some upfront charges, costs still exist and can reduce the amount invested or the growth of your fund over time. Before purchasing a ULIP, it is important to understand how each charge works and compare the overall cost structure with alternative investment options such as mutual funds.

What happens if I surrender a ULIP before 5 years?

If you surrender a ULIP before completing the mandatory 5-year lock-in period, your fund value is transferred to a discontinued policy fund. You cannot immediately access the money and must wait until the lock-in period ends. Depending on the policy and the timing of surrender, certain discontinuation charges may also apply. This lack of liquidity is one of the biggest drawbacks of ULIPs. Therefore, investors should carefully assess their future cash flow requirements and financial goals before committing to a product with a long lock-in period.

Are ULIP maturity proceeds tax-free?

ULIP maturity proceeds qualify for tax exemption under Section 10(10D) of the Income Tax Act, subject to applicable conditions. For policies issued on or after February 1, 2021, the aggregate annual premium across all ULIPs should not exceed ₹2.5 lakh to qualify for tax-free maturity benefits. Premiums paid toward ULIPs may also be eligible for deductions under Section 80C (old regime), subject to overall limits and tax regulations. Since tax laws can change over time, it is important to review the latest provisions before making an investment decision.

Is the life cover in a ULIP sufficient?

In most cases, the life cover offered through a ULIP is not enough for a family's financial needs. The sum assured is usually linked to the annual premium, so if you invest ₹1 lakh per year, your life cover may be only ₹7 lakh to ₹10 lakh, depending on the plan and your age. If you'd like to understand how much coverage your family may actually need, you can use Ditto's cover calculator. This is why many people choose to secure adequate term insurance before considering a ULIP.

Can I switch between funds in a ULIP without paying tax?

Yes. One of the key advantages of a ULIP is that you can switch between equity, debt, and hybrid funds within the policy without triggering capital gains tax. This makes it easier to rebalance your portfolio as your financial goals or risk tolerance change. Many insurers also offer a set number of free fund switches each year, although additional switches may incur charges. While this feature can be beneficial, investors should remember that tax-free switching alone may not offset the impact of higher charges and lower withdrawal flexibility compared to mutual funds.

ULIP vs term insurance plus mutual funds: which is better?

For most investors, a combination of term insurance and mutual funds is the more flexible and cost-effective approach. A term plan provides higher life cover at a lower premium, while mutual funds offer a wider range of investment options and lower costs. ULIPs combine both insurance and investing, but they also come with lock-in periods and multiple charges. That said, ULIPs may be worth considering for investors who value tax-efficient fund switching, long-term investing discipline, and certain tax benefits. The right choice depends on your goals and priorities.

When should I avoid buying a ULIP?

You may want to avoid a ULIP if you need access to your money within the next five years, do not yet have adequate life insurance coverage, or are already investing consistently through mutual funds. ULIPs may also be less suitable for investors who prefer complete flexibility in choosing and switching investments. Since they involve multiple charges and a mandatory lock-in period, they can be restrictive for those with changing financial needs. In many cases, a term insurance plan combined with low-cost mutual funds can offer a more efficient and transparent alternative.

What is the minimum premium for a ULIP?

The minimum premium required for a ULIP depends on the insurer and the specific plan. Many online ULIPs start at around ₹12,000 per year, while others may require annual premiums of ₹25,000 to ₹30,000 or more. The premium amount also influences the sum assured, which is often linked to the annual contribution. While lower-premium plans can make ULIPs more accessible, investors should focus on the overall suitability of the product, including charges, fund options, life cover, and long-term financial goals, rather than choosing solely based on affordability.

How should I evaluate a ULIP before buying?

Before buying a ULIP, review its charges, fund options, life cover, lock-in period, and tax implications. Pay close attention to costs such as premium allocation, mortality, and fund management charges, as these can significantly affect returns over time. You should also compare the ULIP with alternatives like a term insurance plan combined with mutual funds. Consider whether the life cover is adequate, whether the lock-in period suits your needs, and whether the tax benefits justify the additional complexity. A long-term investment horizon is essential for ULIPs.

Last updated on: 15 Jun, 2026