Why ULIPs Are Sold as Investments — But Avoided by Most Advisors
Rohit got a call from his bank’s relationship manager in 2022. The pitch was simple: “Sir, ek hi product mein life cover bhi, aur mutual fund jaisa return bhi. Tax saving bhi. Aur fully flexible.” Rohit was 29, had just gotten married, and was earning ₹90,000 a month. He signed up for a ULIP with a ₹1.5 lakh annual premium.
Three years later, his fund value was ₹2.8 lakh. He had put in ₹4.5 lakh. His cousin, who had started a plain SIP in an index fund the same month and bought a separate term plan, had ₹5.6 lakh — plus ₹1 crore in life cover.
ULIPs — Unit Linked Insurance Plans — are one of the most aggressively sold financial products in India. They are also one of the most consistently avoided by independent financial advisors who have nothing to gain from the sale. That contrast tells you something.
What this article covers
What is a ULIP — and why it sounds so good
A ULIP is an insurance product that also invests your money in market-linked funds — equity, debt, or a mix. You pay a premium every year. Part of it goes toward a life insurance cover. The rest gets invested. You can switch between funds. You get tax benefits. It matures after a certain period.
On paper, that sounds excellent. One product doing two jobs. Tax savings on the way in. Potentially market-linked returns. And if something happens to you, your family gets a payout.
The problem is that paper and reality diverge — dramatically — once charges get involved.
The ULIP charge structure — this is where your money quietly disappears
Here is the full list of what a ULIP typically deducts from your money. Not all charges are disclosed upfront in the sales conversation.
| Charge Type | What it means | Rough range |
| Premium Allocation Charge | Deducted upfront before any investment happens | 1–5% of premium |
| Fund Management Charge (FMC) | Annual fee for managing the investment funds | Up to 1.35% p.a. (IRDAI cap) |
| Mortality Charge | Cost of your life insurance inside the ULIP | Rises every year with age |
| Policy Administration Charge | For maintaining your policy records | ₹50–₹500/month typically |
| Surrender / Discontinuation Charge | If you exit before 5 years | Up to 20–25% of annual premium in Year 1 |
| Fund Switching Charge | Moving money between equity and debt funds | Free for 4–6 switches/year, then charged |
Let’s make this real with rupees.
Say you pay ₹1 lakh a year into a ULIP with a 5% premium allocation charge. That means ₹5,000 is gone before a single rupee is invested. Then fund management charges run at 1.35% annually on whatever is in your fund. Then mortality charges are deducted monthly — rising every year as you age. Then there’s a monthly admin fee. By the time all these charges are taken, the actual amount working for you is significantly less than what you paid.
According to Ditto Insurance’s 2026 breakdown, if your annual premium is ₹1 lakh and the allocation charge is 5%, only ₹95,000 gets invested in Year 1. Compare that to a direct mutual fund — with an expense ratio of 0.1% to 0.5%, virtually the entire ₹1 lakh goes to work from Day 1.
The mortality charge that grows with you
This is the one most people don’t think about. In a term plan, your premium is fixed for 30 years — you pay ₹10,000–12,000 a year for ₹1 crore cover and it never changes.
In a ULIP, the mortality charge — the cost of the life cover inside the product — increases every year as you age. At 30, it’s small. By 45, it’s taken a meaningful chunk. By 55, it becomes quite significant. And it comes directly out of your fund value.
This is one reason the life cover inside a ULIP is often surprisingly low compared to what you’d get from a separate term plan at the same cost.
Why ULIPs are sold so hard — the commission story
In FY2025, IRDAI data shows that agents and brokers earned ₹7,855 crore in commissions from selling ULIPs — a 60% jump from FY2024. That is the highest single-year increase since FY2018. Total ULIP premiums in FY25 crossed ₹1.59 lakh crore, and approximately 4.3% of every rupee collected went to distributors as commission.
To put that in perspective: some insurers paid commission rates of 12–15% on ULIP premiums. Tata AIA paid 15.55% of ULIP premiums as commission to distributors in April–September 2025 alone, according to Cafemutual’s analysis of industry disclosures.
Meanwhile, if you go buy a direct mutual fund, the commission to the distributor is zero. That’s why you will never hear a bank relationship manager tell you to “just buy an index fund and a term plan.” There’s no incentive for them to say that.
This isn’t a conspiracy. It’s just math. People sell what pays them well. The problem is that what pays the seller well isn’t always what’s best for the buyer.
The real numbers — ULIP vs term insurance + mutual fund
This is the comparison that ULIP brochures never show you.
Take Priya, 30 years old, wanting to invest ₹1.2 lakh per year for the next 15 years. She has two options:
Option A: A ULIP with ₹1.2 lakh annual premium, ₹50 lakh life cover, investing in equity funds.
Option B: A 30-year term plan for ₹1 crore cover at ₹12,000/year (leaving ₹1.08 lakh to invest), put the ₹1.08 lakh into a diversified equity mutual fund via SIP.
| What you compare | ULIP | Term + Mutual Fund |
| Annual outflow | ₹1,20,000 | ₹1,20,000 |
| Life cover | ₹50 lakh (typical ULIP) | ₹1 crore (term plan) |
| Amount actually invested | Lower (after all charges) | ~₹1.08 lakh/year |
| Fund management cost | Up to 1.35% p.a. | 0.1–0.5% (direct plan) |
| Lock-in | 5 years (can’t exit freely) | No lock-in for most funds |
| Liquidity | Restricted before 5 years | Redeem anytime (non-ELSS) |
| Estimated 15-yr corpus at ~12% gross | Lower due to compounded charges | ~₹5.8–6.2 lakh per ₹1 lakh invested |
A real case documented by RetireWise in April 2026: a client had been paying ₹1.2 lakh per year into a ULIP from a major insurer for 9 years. Fund value at that point: ₹9.8 lakh. Total invested: ₹10.8 lakh. That’s a negative return over 9 years. The same ₹1.2 lakh in a diversified equity mutual fund at a modest 12% CAGR would have grown to approximately ₹18.5 lakh over the same period — and the person would have had ₹1 crore in term cover for ₹12,000/year instead of ₹50 lakh at far higher cost.
Even after accounting for the new 12.5% LTCG tax on equity mutual fund gains above ₹1.25 lakh, independent analysis in 2026 consistently shows that term + direct mutual fund beats a ULIP by 3–6% net annual return over a 10–15 year period.
What happened to the ULIP tax benefit?
ULIPs used to have a clean tax advantage: premiums up to ₹1.5 lakh were deductible under Section 80C, and maturity proceeds were completely tax-free under Section 10(10D).
That’s no longer fully true.
Since February 1, 2021, any ULIP bought with an annual premium above ₹2.5 lakh (across all ULIPs combined) loses the Section 10(10D) exemption. The gains become taxable as capital gains. Budget 2025 clarified this further: effective April 1, 2026, such gains are taxed at 12.5% LTCG if held over one year — exactly like equity mutual funds.
So if you’re paying, say, ₹3 lakh a year into ULIPs, your maturity proceeds are now taxed the same as if you’d just bought a mutual fund. But with all the extra charges still intact.
The only remaining tax advantage applies if your annual ULIP premium stays under ₹2.5 lakh — and even then, only if you’re on the old tax regime (Section 80C deduction doesn’t exist in the new regime). Since most salaried Indians earning above ₹10 lakh are now better off in the new regime, even that edge has narrowed considerably.
And if you surrender before 5 years — the amount goes into a “Discontinued Policy Fund” earning minimal returns, your Section 80C deductions get reversed, and you pay tax at your slab rate. It’s a financial trap if you need the money before the lock-in ends.
When a ULIP might actually make sense
To be fair — there are narrow cases where a ULIP isn’t the wrong answer.
- You are very undisciplined with money and the forced 5-year lock-in is the only thing that will keep you invested. (Though for most people, a 3-year ELSS lock-in via SIP does the same job more efficiently.)
- You have already crossed ₹1.5 lakh in Section 80C and your total ULIP premium stays under ₹2.5 lakh — you can still get tax-free maturity on an old-regime return filing.
- You have very specific estate planning needs where the insurance wrapper has legal advantages (death benefit is exempt from creditors, for example).
- You already hold a ULIP that’s more than 7–8 years old with good fund performance — in that case, continuing might be better than surrendering and paying taxes.
For 95% of salaried Indians between 25 and 45, none of these conditions apply. And the right answer remains: term insurance for cover + direct mutual fund SIPs for wealth.
Already stuck in a ULIP? Here’s what to do
If you’re currently holding a ULIP, don’t panic. And don’t just surrender it without calculating the cost first.
Before 3 years: probably keep paying
Surrendering in Years 1–3 means surrender charges eat a chunk of your corpus, plus all 80C deductions get reversed. You’re better off completing at least 5 years, then evaluating.
Years 3–5: do the math
Calculate what you’ll get at maturity vs what you’d earn by surrendering at Year 5 and redirecting to a mutual fund for the remaining years. If the fund has performed well and charges are moderate, staying put might still be better than the switching cost.
After 5 years: you have options
Post the 5-year lock-in, surrender charges are usually nil or minimal. At this point, compare your projected maturity value honestly against what a reinvestment into mutual funds would produce over the same remaining period. If the ULIP is underperforming significantly, this is when it makes sense to exit.
Use the fund-switching feature
If markets are volatile and you don’t want to exit, switch to a debt fund within the ULIP — most allow 4–6 free switches per year. This preserves capital without triggering any exit penalty.
What to do right now
- Check if you already have a ULIP — pull out your policy document and look at the charges page. Find the premium allocation charge, fund management charge, and what the mortality charge will be at your current age. Most people have never read these numbers.
- If you’re being pitched a ULIP right now — ask the advisor to show you a side-by-side comparison with a term plan + ELSS or index fund combination. If they can’t produce one, that tells you something.
- Run your Section 80C numbers. If you’re on the new tax regime, Section 80C doesn’t help you anyway. Check your tax regime on the Old vs New Tax Regime guide on this blog.
- If you want market-linked growth, open a direct mutual fund account on Zerodha Coin, Groww, or Kuvera — zero commission, full transparency.
- If you want life cover, get a term plan from PolicyBazaar, Ditto, or directly from HDFC Life, ICICI Pru, or Tata AIA. ₹1 crore cover for a 30-year-old costs ₹8,000–12,000 per year.
The relationship manager who sold Rohit his ULIP earned a healthy commission that day. Rohit earned a lesson. The lesson is free — take it.
Related reading on The Salary Investor
- SIP vs PPF: Which is better for a salaried Indian?
- How much term insurance do I actually need in India?
- ELSS vs PPF: Which is better for tax saving?
- Section 80C: The complete tax-saving guide for salaried Indians
- Old vs New Tax Regime India 2025–26: Which should you pick?
Disclaimer: All data, charge rates, commission figures, and tax rules referenced in this article are sourced from publicly available IRDAI reports, insurer disclosures, and financial news published as of May 2026. Tax laws, ULIP charge structures, and Section 10(10D) rules may change. Investment returns are not guaranteed; past fund performance does not predict future returns. This article is for general financial education only and does not constitute personal financial or tax advice. Please consult a SEBI-registered investment advisor or a chartered accountant before making any investment or insurance decisions.
Sources: ULIP charges breakdown — Ditto Insurance (May 2026) · ULIP vs Mutual Fund updated comparison — RetireWise (April 2026) · ULIP commission payouts rise 60% in FY25 — Cafemutual (February 2026) · ULIP taxation rules Budget 2025 — Fincart (March 2026) · Which insurers paid highest ULIP commissions — Cafemutual (2026)
He figured out most of what he knows about personal finance not from courses or advisors, but from years of reading, making mistakes, and fixing them. The Salary Investor is his attempt to save other salaried Indians the same time and money.
He is not a CA or a SEBI-registered advisor. He writes as a fellow salaried person who has been in the trenches — navigating EPF, ITR, 80C, salary slips, and market volatility.