ULIP Plan Explained: Meaning, Charges, and Whether It’s Worth It

Insurance companies often position ULIPs as an all-in-one financial solution that combines life insurance with market-linked investments. For many customers, this bundled structure appears attractive.

However, despite their popularity, ULIPs can be complex in structure. 

In this article, we break down how ULIPs work, the charges involved, and their limitations is essential before deciding whether it aligns with your financial goals. Let’s dive in.

What Is a ULIP Plan and How Does It Work?

If you’re wondering what is ULIP plan, it helps to understand its two core components: insurance and investment. 

When you pay the premium for a ULIP: 

• A portion goes toward life insurance coverage.
• The remaining amount is invested in market-linked funds chosen by the policyholder.

The value of your investment is represented by units, and the price of each unit is called the Net Asset Value (NAV).

For example, if you invest ₹1,00,000 annually in a ULIP:

• ₹10,000 may go toward insurance costs and charges
• ₹90,000 is invested in market-linked funds

Note: Insurers are required, under IRDAI regulations, to show benefit illustrations using assumed growth rates of 4% and 8% per year. These are only illustration rates used for comparison purposes and are not guaranteed returns. Actual returns depend on market performance and fund selection.

Charges in a ULIP

• Fund Management Charge (FMC)
  FMC are deducted as a percentage of the fund's value and is included in the fund's NAV. According to regulatory guidelines, the maximum FMC allowed in ULIPs is typically capped at around 1.35% of the fund value per year.
• Mortality Charges
  Mortality charges depend on several factors, such as the policyholder's age, sum assured, policy tenure, and health conditions. Mortality charges are usually deducted monthly by canceling units from the policyholder’s investment fund. 
• Policy Administration Charges
  Policy administration charges are fees collected by the insurer to maintain and service the policy. They are usually deducted monthly by canceling units from the ULIP fund and may be either a fixed fee or a percentage of the fund value.
• Switching Charges
  Most insurers allow a limited number of free switches each year. For example, HDFC Life’s Sampoorn Nivesh Plus allows 4 free switches per year. After exceeding this limit, a switching charge may apply, typically ranging from ₹100 to ₹500 per switch, depending on the policy.
• Partial Withdrawal Charges
  ULIP investors are usually allowed to make partial withdrawals after the 5-year lock-in period. Some insurers may charge a fee to process withdrawals, although many policies allow a limited number of withdrawals at no cost. The exact conditions and charges vary by insurer and policy terms.

Apart from the charges mentioned above, ULIPs may also include other fees (premium allocation charge, guarantee charge (where relevant), discontinuance/surrender charges, and miscellaneous/alteration charges), depending on the insurer and the specific policy structure. 

What Happens If You Stop Paying ULIP Premiums During the Lock-In Period?

Discontinuance charges are deducted, and the fund value is moved to a discontinued policy fund. The life insurance coverage and riders cease, and the money remains invested in this fund until the end of the lock-in period.

The discontinued policy fund earns a minimum guaranteed interest rate of 4% per year, which may change later, subject to prevailing rates. Moreover, only a fund management charge (capped at 0.50% annually) can be deducted. The accumulated amount is paid out after the lock-in period ends. 

Some insurers may also allow policy revival within a specified period if the policyholder resumes premium payments.

Types of ULIP Plans and Investment Fund Options

Key Types of ULIP Plans

ULIP plans can be structured in different ways depending on the financial goal they serve, the death benefit structure they follow, and the premium payment mode chosen by the policyholder. 

Based on the death benefit structure, ULIPs can be categorized as: 

• Type 1 ULIP (Higher of Sum Assured or Fund Value)
  Under this structure, the nominee receives either the sum assured or the fund value, whichever is higher, upon the policyholder’s death. Since the insurer’s risk exposure is lower, these policies generally have lower mortality charges.
• Type 2 ULIP (Sum Assured + Fund Value)
  In this structure, the nominee receives both the sum assured and the accumulated fund value. Because the insurer provides a higher payout, mortality charges tend to be higher than those of Type 1 ULIPs.

Based on investment objectives, ULIPs can also be structured for wealth creation, child education planning, retirement or pension planning, and health or protection-oriented needs.

Other than that, based on the premium payment structure, ULIPs can also be classified as single-pay ULIPs, where the entire premium is paid as a lump sum at the start of the policy, and regular or limited-pay ULIPs, where premiums are paid periodically either throughout the policy term or for a specified limited duration.

Popular ULIP Plans in India: LIC, HDFC, & SBI Options

Many insurers in India offer ULIP plans with different investment options, premium structures, and benefits. While some products are frequently searched by customers, it’s important to note that there is no universally “best ULIP with high returns.”

Returns depend on factors such as market performance, fund selection, policy charges, and investment horizon, rather than solely on the insurer.

If you’re comparing a LIC ULIP plan vs a HDFC ULIP plan vs a SBI ULIP plan:

Because ULIPs combine insurance and investment into a single product, it can sometimes be difficult to optimize both objectives effectively.

Insurance Component of ULIPs: Comparison with Term Insurance

ULIPs include a life insurance component, but in most cases, the life cover is tied to the premium amount rather than the policyholder’s actual protection needs.

For example, consider a typical ULIP illustration:

• Annual premium: ₹1,00,000
• For policyholders below age 50, the minimum remains 1.25 times the single premium and 7 times the annualized premium. But for those aged 50 and above, the minimum is 1.10 times the single premium and 5 times the annualized premium. The 105% of total premiums paid floor also applies. 
• Policy term: 25-30 years

In this scenario, the policyholder pays ₹1 lakh per year for a life cover of roughly ₹7-₹10 lakh, with the remaining premium allocated to market-linked investments and policy charges. 

Now compare this with pure term insurance, which provides only life cover. Across several major insurers in India, a healthy non-smoker can typically get:

Premiums for ₹1 crore term coverage typically range from ₹10,000 to ₹22,000 annually, depending on the insurer, policy term, policyholder’s age, health conditions, lifestyle choices, and underwriting factors.

Insurers may offer higher sum assured multiples in ULIPs, depending on the policy design, but the cover often remains significantly lower than what a standalone term insurance policy can provide for the same premium budget.

If you’d like to learn more about term insurance plans, you can check out our comprehensive guide on the best term insurance plans in India.

How to Choose the Best ULIP Plan with High Returns

01

Total Charges

Look beyond the marketing brochure and review all charges in the benefit illustration. It’s important to check the net yield that you can expect (after accounting for charges).

02

Fund Performance

Check the historical performance of the underlying funds, though past returns do not guarantee future performance.

03

Lock-in Period

ULIPs have a mandatory 5-year lock-in, and early surrender can significantly reduce returns.

04

Investment Flexibility

Check how many fund options and switching opportunities are available.

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