What is ULIP (Unit Linked Insurance Plan)?
A ULIP can be described as a life insurance plan that provides both insurance as well as market-linked investments. Under a ULIP, the life insured pays a premium, of which a certain amount is allocated towards life cover, and the balance is invested in funds of the insurer, after applicable deductions. Under a ULIP, the investor is provided with the choice of investing in equity, debt or hybrid-oriented funds, depending on his/her financial goals and risk appetite.
The investment part of a ULIP helps to buy units of the funds in which an investor wishes to invest. The value of units keeps fluctuating depending on the performance of the investments made in them; therefore, a ULIP does not assure a market-linked return. In a ULIP, the investor also gets the flexibility to switch between funds and redirect future premiums, as applicable.
ULIPs can help investors to achieve their long-term financial goals, such as retirement planning, children’s education or wealth creation, alongside providing insurance cover.
Benefits of investing in ULIPs
Flexible investment
ULIP products provide various investment management facilities, subject to the terms and conditions of the plan.
Premium redirection: Under a ULIP, the investor has the flexibility to switch the allocation of future premiums between the funds, as per his/her investment needs.
Top-up premium: Under a ULIP, the investor also has the option to pay a top-up premium (additional to the regular premium), subject to the terms and conditions.
Fund switching: Under a ULIP, the investor has the facility to switch between funds of different risk appetite and investment objective, as per his/her needs.
Financial protection
Under a ULIP, the investor is provided with the insurance cover during the term of the policy. In case of death of the life insured during the term of the policy, the nominee is entitled to claim the death benefit as per the terms and conditions of the policy.
Tax benefits
The tax treatment of a ULIP is subject to the applicable provisions and the conditions as prescribed under the Income-tax Act, 2025. The Income-tax Act, 2025 shall come into force on 1st April, 2026, in place of the Income-tax Act, 1961, subject to its transitional provisions. The provisions for deduction of eligible life insurance premium are subject to the applicable provisions, whereas the maturity proceeds are subject to the conditions as prescribed.
In respect of ULIPs issued on or after 1st February, 2021, the exemption conditions include an aggregate annual premium of ₹2.5 lakh across eligible ULIPs. Where the exemption conditions are not applicable, qualifying ULIPs shall be subject to the capital gains regime from the relevant assessment year. Investors should also understand the TDS Implications for Foreign Remittances where applicable to transactions involving overseas payments or remittances connected with their financial arrangements.
Tax benefits are subject to applicable tax laws and may change.
Growth potential
A ULIP provides exposure to market-linked funds, wherein an investor can participate in the growth of equity, debt or hybrid funds, depending on his/her needs and risk appetite. However, the growth depends on the market performance and the fund chosen; therefore, the risk in respect of the investment is borne by the investor.
How to manage ULIPs
Start early: Starting early provides an opportunity to utilise the power of compounding and time in building wealth.
Choose funds wisely: Choose funds based on your financial goals and risk appetite. Funds that are equity-oriented have a higher risk, whereas debt- or hybrid-oriented funds have a lower risk.
Keep track of the performance: Keep track of the performance of the funds and your asset allocation to ensure that you are on track to accomplish your financial goals.
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Switch funds if required: Switch funds if your financial goals, risk appetite, or perception about the market changes. The number of free switches and conditions applicable to the switch are subject to the terms and conditions of the policy.
Avail tax benefits: Avail the benefits under the tax laws only if you meet the conditions as prescribed under the applicable income-tax laws and regulations.
Stay invested for the long-term: ULIPs are designed to meet long-term financial goals; therefore, it is suggested to stay invested for the long-term to overcome the volatility of the market.
How to choose the right ULIP plan?
Determine your financial objectives
Before choosing a ULIP, decide your financial objectives. Depending on your financial objective (e.g., retirement planning, children’s education, etc.), the investment horizon and allocation of the fund may vary.
Understand your risk appetite
The risk appetite varies from investor to investor; therefore, choose your funds based on your risk-taking ability. For instance, equity-oriented funds are subject to higher market risk as compared to debt and hybrid-oriented funds.
Compare charges
The terms and conditions of a ULIP, including premium allocation charge, policy administration charge, fund management charge, mortality charge and other applicable charges, are subject to the terms and conditions as prescribed. Compare the charges applicable under various ULIP products to choose the one that suits your needs.
Check fund options
The fund options under a ULIP include equity, debt and hybrid funds. The allocation and risk-return profile of the funds may vary; therefore, compare the investment objective and risk-return profile of funds to choose the one that suits your needs, rather than focusing on the historical performance of the funds.
Understand the five-year lock-in period.
A ULIP has a lock-in period of five years. During the lock-in period, partial withdrawal is allowed only upon completion of the lock-in period, as per the terms and conditions. According to the IRDAI’s life insurance product framework, partial withdrawal will be allowed after five years, subject to the terms and conditions.
If an investor discontinues a ULIP during the lock-in period, the applicable discontinuance provisions shall apply to the policy. Therefore, before investing in a ULIP, understand the discontinuance provisions.
Read the policy document carefully.
Before investing in a ULIP, read the policy document carefully and understand the terms and conditions, including policy schedule, illustrations of benefits, charges, exclusions, fund details, premium payment conditions, surrender and discontinuance rules, withdrawal conditions and other applicable terms and conditions. This becomes particularly important when evaluating products such as a ULIP for an NRI in Australia, as the applicable policy terms, regulatory requirements and tax considerations may differ based on the investor’s circumstances.
Conclusion
A ULIP combines life insurance protection with market-linked investment and provides flexibility through fund selection, switching and premium redirection. However, it involves market risk, charges and a five-year lock-in. Therefore, evaluate the policy’s costs, fund choices, insurance coverage, liquidity conditions, and applicable tax treatment before investing.
Last Updated on October 1, 2026 by Nick Ross
