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Top Things To Keep In Mind When Choosing A ULIP

Updated On Oct 21, 2021

ULIPs are insurance plans, hence the income and gains are tax-free under Section 10 of the Internal Revenue Code (10d). The policyholder's short-term earnings from switching from one plan to another are also tax-free. ULIPs have a distinct advantage over mutual funds because of this. Short-term gains in debt funds are taxed at the marginal rate, while long-term gains are taxed at 20% after indexation. Short-term profits in equities funds are taxed at 15%, while long-term gains over Rs 1 lakh in a financial year are taxed at 10%.

However, only if the cover is 10-times the annual premium is the income and gains from the ULIP tax-free. If the premium is greater than 10% of the insurance coverage, the entire amount received at maturity is considered income from other sources and is taxed at the marginal rate.

Top Things To Keep In Mind When Choosing A ULIP

Below are the top 5 things to keep in mind when choosing a ULIP:

1. Determine Why You're Buying A ULIP In The First Place

Before buying a ULIP, you must have a goal in mind. ULIPs yield a bigger amount over a longer period, thus it should be a long-term goal. After five years, a ULIP, for example, might payout 'X' rupees. After fifteen years, the same ULIP could yield 3X to 4X rupees. Before obtaining a Unit Linked Insurance Plan, you must have a long-term goal. The goals/objectives for which you can obtain a ULIP are listed below.

You can choose a good ULIP for retirement to build money that becomes available after the maturity date. On maturity, the ULIP can be converted into an annuity plan, depending on your needs. That means you'll be paid regularly for the rest of your life.

ULIP for children's education: You can choose a suitable ULIP for your children's higher education financial planning.

2. Costs Associated With Purchasing A ULIP

When obtaining a ULIP, there are several fees that must be paid. Knowing what these costs are and what they imply can help you choose the best coverage for your long-term goals. Here are a few significant changes.

Fund management fees: These fees are calculated as a proportion of the assets that the Mutual Fund managers use to run the funds. Before determining the net asset value, or NAV, this fee is deducted.

Policy administration charges: These fees are collected to cover the costs of a company's policy administration and upkeep.

3. Be Aware Of The Funds And Hazards Related To Your Money

Your ULIP premium is divided among numerous funds for investment. Debt, income, and equity funds are the most common types. As a policyholder, you have the right to know where and how your money is invested, as well as the risks involved.

Government securities, market instruments, treasury bills, corporate bonds, and other debt funds are examples of debt funds. Debt securities have a predetermined maturity date and a predetermined interest rate.

Income funds: An investment in an income fund is intended to provide the investor with regular returns. These funds are less hazardous and less volatile than debt funds.

Stock or equities are related to investments made in equity funds. These volatile and risky assets are often known as stock funds or equity securities.

You can choose your investment plan for your money in the above-mentioned funds when you buy the ULIP, depending on your risk tolerance.

4. Understand The Payment And Lock-In Periods For Premiums

It's crucial to understand your ULIP's premium payment and lock-in periods. "The total number of years you as a policyholder will pay the premium to the company," says the premium payment period/term. You can even make a 'paid-up policy,' where the premium payment period is less than the policy maturity time.

The minimum period several fees must require for a plan or policy to mature is referred to as the policy's lock-in period. It's 5 years for ULIPs. To get the profits, you must invest in a ULIP for at least 5 years.


A unit-linked insurance plan (ULIP) is a type of financial product that integrates coverage and financing into one package. A portion of the premium goes toward insurance, while the remainder is invested in mutual funds selected by the policyholder.

Also read - Saving With ULIPs During COVID-19 Pandemic: Everthing You Need To Know

Avantages and Limitations Of ULIPs

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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