Unit Link Insurance Plan (ULIP)

5paisa Research Team

Last Updated: 24 Apr, 2024 01:31 AM IST


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The ULIP full form stands for Unit Link Insurance Plan. It is an insurance plan that provides policyholders with coverage against life risks and simultaneously offers them a market-linked investment option. In today's world, where the market is constantly changing and offering lucrative investment opportunities, ULIPs provide a great platform to investors who want both security and returns.

Thus, you can gain both insurance and investment benefits with ULIP. This guide will help you understand ULIP meaning and the various aspects of this product. With this guide, you can understand all that you need to know about ULIPs and make an informed decision.

Know All About ULIPs

What is a Unit Link Insurance Plan (ULIP)?

Unit Link Insurance Plans, or ULIPs, are life insurance plans that combine both protection and investment options. This type of plan allows a policyholder to invest part of their premiums in several market-linked instruments such as equities, mutual funds, and bonds. The other portion of the premium is used for securing the policy by providing death benefit coverage.

ULIPs provide greater flexibility than traditional insurance policies, allowing policyholders to switch between different investment funds depending on their goals and risk appetite.

How Does ULIPS Work?

ULIPs are a type of life insurance product that combines the features of both investments and insurance. It offers investors the benefits of saving money by way of tax savings, as well as generating returns through market-linked products. The premium the investor pays is invested across various funds depending on their risk preference. A portion of the premium is allocated to cover life, while the remainder is invested in equity or debt markets such as stocks, bonds, and mutual funds. 

The policyholder can switch between funds at any point during the tenure to maximize returns. ULIPs offer several advantages over traditional life policies, such as flexibility, choice of fund options, and greater liquidity with lower lock-in periods.

What is the Lock-in Period of a ULIP?

The lock-in period of a ULIP is the minimum amount of time you will have to remain invested in the policy before you can access any returns or benefits from it. Generally, this lock-in period is between three to five years, depending on the type of ULIP plan purchased.

What are the Costs Associated with ULIPS?

Here are the costs associated with ULIPs that you should consider before investing in them:

1.    Premium Allocation Charges

Premium Allocation Charge (PAC) is an insurance company's charge for investing and managing your money in a ULIP plan. These charges typically vary from 3-5% of your premiums. The premium allocation charge ensures that the insurer covers the administrative costs associated with the policy.

2.    Fund Management Charges

When investing in a Unit Linked Insurance Plan (ULIP), the insurance provider levies fund management charges. These are charged to manage the funds invested in ULIPs and will be withdrawn directly from your ULIP account regularly.

3.    Mortality Charges

A mortality charge is a significant cost associated with ULIPs. It is a charge that insurance companies levy on ULIP policyholders to cover the risk of death during the term of the policy. It is generally expressed as a percentage of the sum assured and decreases with age.

4.    Policy Administration Charges

When you buy a Unit Linked Insurance Plan (ULIP), the insurance company charges an annual or semi-annual fee known as Policy Administration Charges. This fee is calculated based on factors such as the premium amount, fund performance, and policyholder age.

5.    Surrender Charges

ULIPs usually come with a surrender charge, which is applicable if the policy owner withdraws or terminates the plan prematurely. The charge can be up to 5-6% of the premium paid, varying from one insurance company to another. It also depends on when in the policy tenure you choose to surrender/terminate it – if you do it within the first 1-2 years, you may be charged higher than if done after, say, 4-5 years.

What Are The Types of ULIPS?

●    Equity Funds

Equity Funds are the most famous type of ULIPs. They invest in stocks to provide higher returns over the long term (5 years+). These funds have a higher risk profile than other types of ULIPs. 

●    Debt Funds

Debt Funds are relatively less risky than Equity Funds, as they mainly invest in government bonds and debt instruments. The returns are usually lower than Equity Funds, but they also realize gains much faster.

●   Balanced Funds

Balanced Funds are the most balanced type of ULIPs, as they invest in stocks and bonds. This allows them to provide steady returns over an extended period while maintaining an acceptable risk level.

●    4G or Whole Life ULIPS

4G or Whole Life ULIPS provide “Life Cover” and “Investment Returns” in a single plan. This type of ULIP generally has higher premiums but also provides long-term security and returns on investment. 

What Are The Risks Associated With ULIPS?

There are various risks associated with investing in ULIPs. It is important to understand these risks before investing in a ULIP plan. These risks include:

●    Market risk: The value of your investments can go up or down due to market fluctuations. This means that the value of your ULIP may decrease, resulting in a loss for you as an investor.

●    Insurance risk: There is always a chance that the insurance company providing the ULIP plan may become insolvent and unable to pay out on any claims.

●    Returns risk: The returns from investing in ULIPs vary depending on the performance of the various investment options available within the plan. You may not receive the expected returns due to the poor performance of some or all of these investments.

●    Cost risk: Costs associated with ULIPs can be high due to insurance companies' administration and management fees and charges for buying and selling investments within the plan.

What Are the Tax Benefits Associated with ULIPs?

Mentioned below are the major tax benefits associated with Unit-Linked Insurance Plans (ULIPs):

●    Ulip investments are eligible for a deduction of up to ₹1.5 lakhs as per Section 80C of the Income Tax Act.
●    The returns on ULIP investments are tax-free under Section 10(10D) of the same act, provided they have been held continuously for 5 years or more.
●    Premiums paid towards ULIP plans qualify for deduction from taxable income up to the limit specified in Section 80C, and the maturity proceeds are exempt from taxation under section 10(10D).
●    An additional deduction of up to ₹50,000 is allowed under section 80CCD(1B) of the Income Tax Act.
●    The funds from ULIP investments can be used to purchase an annuity exempted from tax.

What Are The Pros and Cons of Investing in ULIPS?


●    ULIPS can be purchased with low minimum investment amounts, making them perfect for those who are just starting to invest or have limited funds.
●    It offers flexible investment options, allowing investors to switch between insurance and investments without closing their account.
●    ULIPS offers tax benefits, such as tax deductions for the premiums paid and maturity benefits that are tax-free.
●    The best part is that ULIPS offers potential long-term growth opportunities, depending on the performance of the underlying investments.
●    ULIPS provides insurance coverage, offering protection and peace of mind in unfortunate events such as death or disability.


●    ULIPS can be complex investments, and understanding the various terms and conditions can be difficult.
●    They are subject to market risk, means the value of your investments could go down depending on market conditions.

How to Maximise Returns from a ULIP?

As per the ULIP definition, Unit Linked Insurance Plans (ULIPs) combine life insurance benefits with investment. To maximise your returns from a ULIP, there are a few key points that you need to consider:

1. Choose the Right Policy Term
2. Consider Investing a Lump Sum
3. Regularly Monitor Your Portfolio
4. Switch Funds to Optimise Returns
5. Utilise Tax Benefits

How Does Ulip Compare With Other Investment Options Under 80C - Comparative Analysis

Here's a comparative analysis table of ULIPs with other investment options under Section 80C of the Income Tax Act:

Investment Option




Lock-in Period



Market-linked, potentially high returns

Partial withdrawals allowed after 5 years

Premium allocation charges, policy administration charges, mortality charges, fund management charges

5 years

Market risk


Market-linked, potentially high returns

Can be redeemed after 3 years

Expense Ratio

3 years

Market risk


Fixed returns, currently 7.1% per annum

Partial withdrawals allowed after 5 years


15 years

Low risk


Fixed returns, currently 6.8% per annum

Can be encashed before maturity with a penalty


5 years

Low risk

Tax-saving FDs

Fixed returns, varies from bank to bank

Can be withdrawn prematurely with a penalty


5 years

Low risk


Things to Keep in Mind Before Selecting a ULIP

Here are the things to keep in mind before selecting a ULIP:

1. Performance: ULIPs are long-term investments with a lock-in period of 5 years. The returns on your ULIP will depend on the performance of the funds you choose. It is advisable to review the past performance and track record of the fund options available under the policy before investing.

2. Risk Profile: ULIPs are market-linked investments and carry an element of risk, as their returns depend on the performance of the funds selected. Hence, it is important to understand your risk appetite and select a ULIP that best matches your needs.

3. Tax Benefits: ULIPs can be leveraged to enjoy tax deductions of up to Rs.1,50,000 permitted under Section 80C of Income Tax Act, 1961. However, to avail of the maximum tax benefits, you must ensure that your total investments in products eligible for deduction under Section 80C (including ULIPs) are at most Rs. 1,50,000 in a financial year.

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Frequently Asked Questions

A ULIP operates by investing a portion of the money received from you into various investment instruments including stocks, bonds, and mutual funds. The remaining portion covers insurance costs associated with providing life cover for you.

ULIPs are suitable for long-term investment goals such as retirement planning, children's education or marriage, and wealth creation. If you have a medium to long-term financial goal which requires a lump sum amount at the end of the term, ULIPs are an ideal choice due to their dual benefit of insurance coverage and market-linked returns.

Maximizing your ULIP returns begins with selecting a plan that best suits you and your financial goals. It is also important to regularly review the performance of your investments, rebalance the funds if needed, and switch funds when necessary. Other methods of maximizing returns include opting for higher premiums and investing in high-risk options where the returns are typically higher.

The fund value of a ULIP policy is calculated by multiplying the unit price of each underlying fund by the number of units held by the investor. The unit price refers to the rate at which one unit can be bought or sold in a particular fund, which is subject to change daily. The computation for the fund value is thus done by multiplying the unit price with the number of units held by the investor.

A lock-in period is the minimum amount of time an investor must hold a unit-linked insurance plan (ULIP) before withdrawing any funds or surrendering their policy. The lock-in period for ULIPs varies, typically between 3 and 5 years. During this period, the investors cannot access their investments or bonuses earned by their policies.

●    A ULIP lock-in period helps you to secure a long-term investment horizon, as the funds remain invested until the end of the chosen lock-in period.
●    A ULIP lock-in period also allows you to avail of long-term tax benefits, as the premiums paid are eligible for tax deductions under Section 80C of the Income Tax Act.
●    Lastly, the ULIP lock-in period also helps to enhance your savings by ensuring that you stay focused on achieving your long-term financial goals without withdrawing your funds prematurely.