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10 Most Frequently Asked Questions about ULIP

August 03, 2023


In this policy, the investment risks in the investment portfolio is borne by the policyholder

When it comes to long-term investments, Unit Linked Insurance Plan (ULIP) has become quite a popular choice these days for the high returns they generate. As a result, more and more people are curious to know about the plan and all the relevant details to get full clarity on how beneficial it can be for their financial goals. Following are the ten most commonly asked questions regarding ULIP investment and the respective answers.

1. What is ULIP?

Unit Linked Insurance Plan is a financial instrument that doubles up as life insurance as well as an investment opportunity. The premium you pay for your ULIP investment is divided into two parts— one goes to form the life cover while the other is invested in equities, debt funds or a mix of the two.

2. What is a Unit?

The ULIP investment you make is divided into a set of individual parts. Each of them is called a unit.

3. What is NAV?

Net Asset Value (NAV) in ULIP is the price of each unit of the fund. It’s calculated in rupees.  

4. What do you get as a death benefit in ULIP?

The amount of the death benefit in ULIP investment varies according to the nature of the policy. The ULIP plan is available in 3 categories of premium payment: Single pay (One-time premium payment), Limited Pay (Premium is paid for a certain period) and Regular Pay (Premium paid regularly till maturity). The amount payable in case of the untimely demise of the policyholder varies accordingly.

For Single pay: The death benefit is the highest of

a. Sum assured including top-ups (if any) and deducting the partial withdrawal amounts (if any)

b. Fund value including top-up (if any)

c. Minimum death benefit amount specified in the policy

For Limited or regular pay: The death benefit is

  • For entry age less than 50 years, higher of (A+B) or C
  • For entry age equal to or greater than 50 years, the highest of A, B or C

5. What is the maturity benefit of ULIP?

The maturity benefit in the ULIP investment is the total fund value created at the time of maturity of the policy.

6. Does ULIP allow withdrawals? 

ULIP has a lock-in period of five years, as set by the Insurance Regulatory and Development Authority of India (IRDAI). Post that period, withdrawals are allowed from your ULIP investment but the yearly amount should not exceed 20% of the fund value.  

7. What is a fund switch?

A ULIP investment offers the policyholder to switch funds and restructure his portfolio according to his changing risk appetite and financial needs. If he is a risk taker looking to get high returns, investment can be made in equities only. Now if over time he prefers catering to low risk and achieving guaranteed returns, the policyholder can switch his investment completely from equities to debt funds or fixed interest schemes or can opt for a combination of debt bonds and equities. Insurers allow this fund to switch for a fixed number of times a year, beyond which a charge is payable. Some insurers are offering unlimited switches too.

8. What is a premium redirection?

Like a fund switch, a premium redirection is another flexibility offered by ULIP investments. In the course of the policy, you can choose to allocate your future premiums in a new fund, while the older premium remains invested in their older fund locations. So, you redirect your premium here.

9. Are there tax benefits in ULIP?

Yes, ULIP investment offers tax benefits like any other insurance plan. Here the death benefit is tax-free under section 10(10D) of the Income Tax Act 19611 while the maturity benefit is also eligible for tax exemption subject to the same section. Besides premium payments up to Rs 1.5 lakhs per annum are exempted from tax under section 80C. 

10. Can I surrender the policy before the lock-in period is over?

Yes, surrendering the policy is allowed within the lock-in period with a charge deducted. But the policyholder will receive the money only after the five-year period is over. In the meantime, the investment amount will be kept in the Discontinued Policy Fund at 4% interest. 

Related Articles:

ARN - ED/07/23/3262

1. Subject to conditions specified u/s 80C of the Income tax Act, 1961.

The afore stated views are based on the current Income-tax law. Also, the customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.