ULIP FAQs: Answers to most common questions on ULIPs
A Unit Linked Insurance Plan (ULIP) is a versatile financial product. It has dual features of insurance and investment plans. It can be used for several long-term goals, ranging from retirement to children’s higher education.
Here is a list of ULIP FAQs to give you a deeper understanding of this multipurpose financial product.
What is a Unit Linked Fund?
A ULIP’s premium serves two distinct purposes. Firstly, a portion of the premium provides insurance coverage. This amount is used to ensure that, in the unfortunate event of the policyholder's demise during the policy term, a benefit is paid to the nominee of the plan.
The second portion of the premium is invested in various funds, known as unit-linked funds. These funds can be invested in equity, debt, and hybrid funds:
Equity unit-linked funds: These funds primarily invest in equities or stocks and aim for higher returns over the long term. However, they also carry high risk.
- Debt unit-linked funds: These funds invest in fixed-income instruments. These can be government securities, corporate bonds, certificates of deposit, and commercial papers. They focus on generating stable returns and carry lower risk.
- Hybrid unit-linked funds: A balanced allocation between equities and fixed-income securities are chosen to ensure balanced growth and stability.
Is ULIP a good investment?
A ULIP does many things, which makes it an effective investment tool. It provides life cover so that a family does not suffer financial loss in case of any unfortunate event. The massive coverage provided by ULIPs enables families after the passing of a loved one to be financially stable and to meet their needs in the future while also combating inflation.
ULIPs enable you to invest the money for different financial goals including home, retirement, child’s education and marriage, and others. The duality of the product allows you to meet several financial objectives as well as fulfil your financial obligations towards your family.
How safe is a ULIP?
The safety of a ULIP is linked to the type of fund you invest in and the portfolio strategies you choose. ULIPs offer three main categories of funds – equity, debt, and hybrid. If you choose equity funds, the risk will be high, and so can the returns. On the contrary, the risk and return can be lower if you choose debt funds. If you prefer medium risk and returns, you can consider hybrid funds.
Besides, ULIPs have an in-built life coverage provision where the nominee is paid an amount in the unfortunate incident of the policy buyer’s death. This payout is conditional and is only payable when the policy is still valid, and all the premiums have been paid to provide safety in the plan.
How can I invest in ULIPs?
Here are the steps to invest in a ULIP:- Look for ULIPs that cater to your financial needs and a premium that fits within your budget.
- Determine your financial goals and the required amount of coverage before deciding on a suitable sum assured amount that will provide adequate financial security to your beneficiaries.
- You can select the type of funds best suited to your goals and risk appetite. You can choose from equity, debt, or hybrid funds.
- Once you have selected the plan and the funds, pay the premium amount.
- Paying the premium should activate your ULIP plan.

Why should I invest in ULIP now?
Delaying is discouraged when it comes to planning for your financial goals. Investing in a ULIP early can offer a long-term investment horizon and allow your funds to grow through compounding. Moreover, the life cover provided will maintain financial security for your family in case of unforeseen events.
What makes ULIPs a dual benefit option?
ULIPs offer a dual benefit by combining investment and insurance components in one plan. This unique combination allows you to focus on your financial growth and the financial security of your loved ones.
The investment component prepares for future financial needs, such as home ownership, retirement, or a child's education. However, since investment returns are not guaranteed, they may not be sufficient to secure your family's future. This is where the insurance component steps in. A ULIP provides a guaranteed death benefit to ensure financial security for your family in the event of your demise.
Combining both aspects, ULIPs offer the best of both worlds. They help you achieve your financial goals while safeguarding your family's financial well-being.
What is the amount that I receive at the end of my policy term?
The maturity benefit you receive at the end of your ULIP policy term will depend on several factors, including the performance of your chosen funds, the amount you invest, the investment horizon, the types of funds selected, and the economic conditions during the investment period.
Since ULIPs are linked to the market, there is no fixed maturity amount. It varies based on your investment choices. Generally, the longer you stay invested, the better the potential returns you can earn.
Can I withdraw my money before maturity from a ULIP?
ULIPs have a mandatory five-year lock-in period, during which you cannot withdraw your money. ULIP withdrawal after 5 years is permitted, and you also have the option to discontinue the ULIP policy. However, staying invested for the entire policy term is generally advised to maximise returns.
Can I make withdrawals from my policy?
Yes, you can make a partial ULIP withdrawal after 5 years once the lock-in period is over. However, it is important to consider that staying invested can be more beneficial in the long run. You must also know that withdrawals are subject to the terms and conditions of your policy, so it is essential to review these carefully before making any decisions.
Are ULIP returns guaranteed?
ULIPs are basically long-term market-linked investment tools, which means that the policyholder is not assured of getting a fixed amount at maturity. The income you earn is uncertain, and it depends on factors such as market returns, the investment horizon, and the types of funds that you have chosen. Thus, it is imperative that one evaluate his/her tolerance for risk before investing in ULIPs.
Can ULIPs give higher returns?
ULIPs provide a wide portfolio of funds and investment plans involving equity, debt, and a combination of both. If put in the right funds and for the right tenure, ULIPs can prove to be very beneficial and can provide great returns. For example, historically, equity funds have been found to give higher returns than debt funds in the long run.
Hence, returns vary with the type of investment made and the state of the market. When choosing the right ULIPs, one should focus on his or her risk-taking capacity and look at the market when making investment decisions. An insurance agent or financial advisor can also provide assistance in order to invest in appropriate mutual funds.
Are ULIPs tax-free on maturity?
The tax paid on ULIPs at maturity is subject to the following conditions:
- If the ULIP was issued on or before February 1, 2021, the maturity benefits are tax-free under Section 10(10D) of The Income Tax Act, 1961, regardless of the total premiums paid annually.
- If the ULIP was issued on or after February 1, 2021, and the annual premium remains below ₹ 2.5 lakh for all years during the policy tenure, the maturity benefits are tax-free. However, if the annual premium exceeds ₹ 2.5 lakh in any given year during the policy tenure, the maturity benefits be taxed under Section 10(10D) of the Income Tax Act.
- If the ULIP is issued on or after February 1, 2021, and the cumulative annual premium remains below ₹ 2.5 lakh for all years, the maturity benefits from each ULIP remain tax-free. However, the benefits will be taxable under Section 10(10D) of the Income Tax Act if the total premium exceeds ₹ 2.5 lakh in any given year.
- The death benefit received from a ULIP is tax-free for the policyholder's beneficiaries under Section 10(10D) of the Income Tax Act.
Can I stop ULIP?
Yes, you will be able to surrender the ULIP policy after fulfilling the lock-in period, but this will depend on the specific plan you have. However, discontinuing the ULIP policy may be costly since certain mutual funds may charge surrender fees and, as a result, increase the amount of investment returns. Hence, the following factors are worth bearing in mind before opting to put a halt to a ULIP.
What are allocation charges in ULIPs?
ULIPs come with some fees, such as the premium allocation charge. This fee is incurred only at the time of purchasing the ULIP and is levied on the first premium paid towards the policy. It covers various expenses, including underwriting and commission charges, among others. Typically, the premium allocation charge is deducted as a percentage of the ULIP premium.