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Pros And Cons of ULIPs

Published On Oct 12, 2021

Unit linked insurance plans, or ULIPs, are a type of insurance that combines investing and insurance. For a term of 5-15 years, policyholders must pay a premium either monthly, semi-annually, or annually. Despite the stock market's volatility, bank-led assurers are aggressively selling life insurance companies' unit-linked insurance plans (ULIPs). ULIPs have a competitive advantage thanks to the introduction of long-term capital gains on equities and equity-related investments, which are tax-free at maturity. It's an exempt-exempt-exempt product, which means the investor can claim a tax break under Section 80C of the Internal Revenue Code.

The amount invested in ULIPs qualifies for a tax credit under Section 80C, up to a maximum of Rs 1.5 lakh per year, but only if the premium does not exceed 10% of the total assured.

As an investment alternative, ULIPs are becoming increasingly popular. They are a single plan that combines investment and insurance. They also have a number of tax benefits. If you're looking to make your first investment, a ULIP may be the greatest option because it provides a lot of flexibility while limiting risks.

Advantages Of ULIPs

Below are a few of the advantages of ULIPs:

  • Long-Term Investment

ULIPs are an excellent choice for people looking to invest for the long term. This is because short-term market volatility produces lesser returns, but long-term market investments produce very attractive returns. They're perfect for people who want to put money down for a long-term goal, such as their child's school or marriage.

  • Tax-Free Returns

ULIPs provide tax-free and tax-advantaged returns. Under section 80C of the Internal Revenue Code, ULIP premiums are tax-deductible. Additionally, the death benefits received from ULIPs are tax-free. The policyholder is also entitled to the guaranteed payout or the value of the fund's investments, whichever is greater, and these returns are not taxed.

  • Partial Withdrawals

Policyholders are also permitted partial withdrawals after the lock-in period, as long as they do not exceed 20% of the policy's fund value. Additionally, these withdrawals are tax-free.

  • Good Returns

Depending on the fund in which one invests, ULIPs can provide good returns. If the fund is substantially engaged in capital markets, the fund will do well if the stock markets do well. Because ULIPs include a mortality benefit, they act as a safety net in the event that the policyholder passes away unexpectedly, as the nominees can make a claim for the sum assured.

  • Flexibility

ULIPs give investors the ability to switch between investment funds as their goals and needs change. Policyholders can profit from the fluctuation in stock values by switching between equity, debt, and cash. If they are unfamiliar with how to actively manage their funds, they can choose monthly programmed switches, in which a fixed amount is switched at a specific date.

Disadvantages Of ULIPs

Below are a few of the disadvantages of ULIPs:

  • Expensive And Complex

Because ULIPs mix insurance and investing, the premiums charged for life insurance end up being much higher than term insurance. They're also complicated in terms of fees, and they're not really transparent about how much of the money goes to insurance, management, and investing. As a result, redemptions at the conclusion of the lock-in period are not feasible because the fund value may be low at the time due to greater beginning charges

  • Higher Beginning Costs

ULIPs are more expensive in the first few years due to charges levied on the investor that goes toward policy charges. 

  • Market Fluctuations

In the early years, investors can expect lesser profits due to market changes. So, if you're wanting to invest for the short term, ULIPs aren't the best option.

  • Switches Are Chargeable

Most insurers give free switches up to a specified number, beyond which switches are charged for each transaction.

  • Lock-In Term

There is a five-year lock-in period for ULIPs, during that no withdrawals are permitted.


ULIPs come with a number of benefits and drawbacks. ULIPs are a wonderful alternative for those who wish to invest in instruments that provide a variety of benefits under one roof, such as good returns, tax savings, and life insurance. However, because the roles of investments and insurance are so dissimilar, it is generally advised that they be maintained separately.

Also read: 

How to Compare & Buy ULIPs in India?

Do ULIPs Allow Partial Withdrawal?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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