How to Choose the Best ULIP Plan in India?

Table of Content

1. What Are ULIP Plans & How Do They Work?

2. How to Choose the Best ULIP Plans Step by Step

3. ULIPs Lock-in Period and Charges

4. What is NAV in ULIPs?

5. Eligibility Criteria to Buy ULIPs

6. Reasons to Purchase ULIPs

7. Conclusion

8. FAQs on How to Choose the Best ULIP Plan

What Are ULIP Plans & How Do They Work?

A ULIP is a dual investment strategy that provides a life insurance policy and a market-linked investment opportunity within the same plan. You can grow wealth while ensuring financial protection for your family. 

A portion of the premium you pay in a ULIP plan goes towards life coverage, while the other portion is invested in different equity, debt or hybrid funds. This way, your investment is converted into units, and their Net Asset Value (NAV) fluctuates with market performance. 

On maturity, you receive the total fund value, and in case of death, your nominee gets the higher of the fund value or the sum assured. Professional fund managers are responsible for managing ULIPs that aim to generate long-term growth for investors. 

Therefore, ULIP funds provide the dual benefit of insurance security and returns based on market performance, enabling you to grow your investment in the long run. 

How to Choose the Best ULIP Plans Step by Step

Planning to buy a suitable ULIP? Here is a step-by-step guide to choosing the best ULIP plan:

• Step 1: Define Your Financial Goals

Define your financial objectives clearly before selecting a plan. ULIPs are goal-based, which makes it essential to select a plan with a clear financial purpose to avoid mismatched outcomes. Then, match the plan to your timeline and required corpus. 

For example, saving for a child’s education in 15 years suits a ULIP with higher equity exposure. However, retirement over 25 years favours an equity-heavy option. 

• Step 2: Assess Your Risk Appetite

Risk appetite is the level of investment risk you are comfortable with. You can be either risk-loving, risk-neutral or risk-averse, depending on which you select a ULIP. It offers three main investment fund options, which are equity (high risk), debt (low risk), and balanced/ hybrid (moderate risk). 

Generally, younger investors prefer investing in equity because of the high return, while those nearing retirement may prefer debt funds because of the low risk. Therefore, honestly assess your ability to bear risk before selecting a ULIP. 

• Step 3: Understand ULIP Charges and Costs

ULIPs have charges such as premium allocation charge, fund management charge, policy administration charge, switching charge, surrender charge, partial withdrawal charge, mortality charges and miscellaneous charges. These are deducted from your investment and vary by insurer and plan. You must keep in mind that a plan with lower charges increases your long-term corpus. Therefore, always review the benefits and compare two to three plans before selecting.

• Step 4: Review Available Fund Options

ULIP funds include equity (stock-focused, high risk, long-term growth), debt (bonds and money markets, low risk, stable returns), and balanced (mix of equity and debt for moderate risk). You can split premiums across multiple funds to match your goals and risk levels. It is better to diversify your investment portfolio to reduce risk and use fund-switching options to adapt to market changes. 

• Step 5: Understand the Lock-in Period and Liquidity

According to the Insurance Regulatory and Development Authority of India (IRDAI), all ULIPs have a 5-year lock-in period during which partial withdrawals are not possible. They are ideal for long-term investors, not for short-term liquidity needs. So, assess whether you can block funds for 5 years before selecting a ULIP to avoid future financial burdens. 

• Step 6: Read Policy Documents Thoroughly

Always read the complete policy terms and conditions carefully before selecting a plan. You must have a thorough idea of the policy features, inclusions, exclusions, surrender clauses, charges and riders#.

This is because having an idea of these details prevents you from selecting the wrong plan. Also, in financial products, transparency builds trust and ensures you are making the right investment decisions for yourself. 

• Step 7: Analyse Historical Fund Performance

Analysing past data is not a guarantee of the future, but it can be a useful benchmark to assess the fund's performance. It is better to review either a 3-year or a 5-year performance, especially for equity and balanced funds. 

Furthermore, checking fund fact sheets, rankings, and consistency will help you select a ULIP. You can use IRDAI-approved or insurer-provided performance charts to make an informed comparison of different ULIPs before selecting. 

• Step 8: Check Applicable Tax Benefits

ULIP premiums qualify for a tax deduction up to Section 80C of the Income Tax Act, 1961*, up to a maximum of ₹1.5 lakhs annually. Moreover, maturity proceeds are tax-free under Section 10(10D) of the Income Tax Act, 1961* if premium thresholds are met. These two tax benefits make ULIPs an attractive investment option for salaried and self-employed individuals, offering investment and tax-saving options. 

• Step 9: Evaluate Additional Features and Riders

While selecting the best ULIP option, look for optional riders such as waiver of premium, accidental death, or critical illness coverage. These additional features will enhance your financial security and give you peace of mind. Choose a ULIP that allows customisation so you can include benefits to match your personal needs and safeguard your future. 

ULIPs Lock-in Period and Charges

ULIPs have a fixed lock-in period of 5 years, meaning no withdrawals or surrenders are allowed during this time. This promotes long-term investment discipline in individuals to fulfil their financial goals. However, you can withdraw a partial amount in case of an emergency after the minimum lock-in period is over. 

The key charges in a ULIP include the following:

• Fund management

• Policy administration

• Switching charges

• Premium allocation

These charges are deducted from your fund value. Therefore, always review these costs carefully before choosing the ULIP to ensure they align with your goals. 

What is NAV in ULIPs?

In ULIPs, Net Asset Value or NAV is the price of one unit in a fund. Your premium buys units at the prevailing NAV, which changes daily based on charges and market performance. The value of your ULIP depends on the units held and their NAV. Furthermore, tracking NAV helps you monitor your investment’s growth over time. 

For example, if the NAV of your ULIP equity fund is ₹25 and you hold 1,000 units, your fund value is ₹25,000. If the NAV rises to ₹28, your fund value increases to ₹28,000, reflecting market performance. 

Eligibility Criteria to Buy ULIPs

Not only do you need to know how to choose the best ULIP plan, but being familiar with the eligibility criteria is equally crucial. The eligibility criteria for buying ULIP in India are given below:

• Citizenship and Age: ULIPs are available to Indian citizens between the ages of 18 and 65 years. 

• Policy Selection: Buyers must select a payment mode (monthly, yearly, etc.) and a policy term. 

• Document Submission: KYC documents like PAN card and Aadhaar card are mandatory. Some insurers may review income and occupation. 

• Eligibility Confirmation: Always confirm eligibility requirements with your chosen ULIP provider before applying. 

Reasons to Purchase ULIPs

One of the biggest reasons to purchase a ULIP is that it offers flexibility to pay premiums. Here are some of the other reasons to purchase ULIPs: 

• Benefits of Liquidity

ULIPs allow partial withdrawals after the end of the 5-year lock-in period. This makes them suitable for planned expenses like a child’s education or home renovation. Also, the convenience of flexibility gives better access to funds than many traditional plans, ensuring you can meet life goals without disrupting your long-term investment strategy. 

• ULIPs are Transparent

ULIPs offer complete clarity on charges and fund performance from the beginning of the investment. Regular fund updates empower you to make informed decisions, while transparent policies build trust. 

This transparency ensures you can control your investment according to your financial needs. Hence, knowing exactly how your money is managed and how it is performing over time gives you control over your investments. 

• Low Surrender Charges

Low surrender charges act as a safety net if your financial needs change or you cannot pay the premium anymore. This way, if you exit the policy early, you will not be penalised with a high surrender charge. With the flexibility of low surrender charges, your financial stress will reduce, ensuring your plan stays aligned with your changing needs. 

• Life Coverage

ULIPs provide the dual advantage of life cover and investment growth depending on market performance. Your family remains financially protected against uncertainties, regardless of market conditions. This built-in insurance ensures peace of mind, making ULIPs a 360° financial safety solution that protects and grows your wealth in the long run. 

• Customised Plans

ULIPs let you switch between different funds, which are equity, debt, and hybrid, at any time, adapting to market trends or personal financial goals. Moreover, you have the flexibility of redirecting premiums and top-ups, allowing you to customise your plan as your circumstances change. This ensures your ULIP continues to meet financial objectives. 

• Savings for the Future

ULIPs are considered to be suitable as long-term investment avenues because they promote discipline through regular contributions. The 5-year lock-in is one of the main reasons to encourage regular contributions and stop you from making impulsive withdrawals. Furthermore, structured investing ensures steady progress towards life goals, making ULIPs a built-in commitment to secure financial stability. 

Conclusion

ULIPs combine life insurance protection with market-linked returns, helping you invest with discipline while building wealth for goals like retirement, child education, or legacy planning. They offer flexibility, transparency, and tax benefits, making them a well-rounded long-term investment option. 

If you want an income and investment solution to secure your family’s future, ULIPs are worth considering. Along with knowing how to choose the best ULIP plan, review policy documents carefully, understand charges, lock-in period, and fund options to select one that matches your risk profile and financial goals.

FAQs on How to Choose the Best ULIP Plan

1. Is ULIP a good choice?

Yes, investing in ULIPs is a good option because it offers the dual benefits of life insurance and market-linked investment growth. They are suitable for long-term goals, such as investment or education plans. Also, they offer tax benefits and provide the flexibility of switching funds. 

2. How to choose the best ULIP?

You can select the best ULIP plan by understanding your financial goals and ability to bear risk. Then you can compare fund options, check charges and review historical performance of the fund before investing. Choose a plan with transparency, flexibility and strong fund management that aligns with your long-term financial goals. 

3. Which is better, ULIP or term plan?

A term plan offers pure life coverage at a low cost. Whereas a ULIP combines life insurance with investment. This indicates serving different financial objectives. So, select the plan that will be the best to serve your financial purposes and make your investment portfolio stronger for the long run. 

4. Is ULIP good for 10 years?

Yes. ULIPs perform best over the long term, and a 10-year horizon gives you investment time to overcome market volatility and reduce risk. This duration allows the compounding effect to work, increasing the chances of achieving higher returns while enjoying life coverage throughout the term. 

5. How do I know which ULIP fund type suits my risk profile?

To know which type of ULIP suits your risk profile, assess your risk tolerance and financial goals. Therefore, moderate investors should go for balanced funds and consider their age, income stability, and comfort with market fluctuations before selecting their ULIP fund type.