A ULIP combines life cover with market-linked investment. Learn about NAV, fund choices, charges and the 5-year lock-in, and why the investment risk is yours.
A ULIP, or Unit Linked Insurance Plan, is a policy that combines life insurance with market-linked investment. Part of your premium pays for life cover and charges, and the rest is invested in funds of your choice, such as equity (shares), debt (bonds) or a mix of both.
Unlike traditional endowment or money back plans, the value of a ULIP goes up and down with the market. That is the single most important thing to understand before buying one.
In a ULIP, the investment risk in the investment portfolio is borne by the policyholder. Your fund value can fall as well as rise, and there is no assurance of how much you will get back.
How a ULIP works
- You pay a premium (regularly or as allowed by the plan).
- After deducting certain charges, the balance is used to buy units in the fund you have selected.
- Each unit has a price called the NAV (Net Asset Value), which changes daily with the market value of the fund's investments.
- Your fund value = number of units you hold × current NAV.
- On maturity, you receive the fund value. On death during the term, your nominee receives the death benefit as defined in the policy (usually linked to the higher of the sum assured or fund value, as per plan terms).
What is NAV?
NAV is like the "price tag" of one unit. If a fund's investments rise in value, the NAV goes up; if they fall, the NAV goes down. Because units are bought at the NAV of the day, the same premium buys more units when NAV is low and fewer units when NAV is high.
Fund options
Most ULIPs let you choose between funds with different risk levels:
| Fund type | Mainly invests in | Risk level |
|---|---|---|
| Debt / bond fund | Government and corporate bonds | Lower |
| Balanced fund | Mix of bonds and shares | Medium |
| Growth / equity fund | Shares of companies | Higher |
Many plans allow you to switch between funds a certain number of times a year. Choose a fund that matches your comfort with risk and how long you can stay invested.
Charges in a ULIP
ULIPs have several charges, which are disclosed in the brochure and policy document. Common ones include:
- Premium allocation charge: deducted from the premium before units are bought
- Policy administration charge: a regular charge for running the policy
- Mortality charge: the cost of your life cover
- Fund management charge: deducted by adjusting the NAV
- Switching, partial withdrawal and discontinuance charges, where applicable
Charges reduce your fund value, so always read the charges section carefully. Some plans offer features such as Guaranteed Additions or a refund of mortality charges on maturity, subject to conditions.
The 5-year lock-in
ULIPs have a 5-year lock-in period. If you stop paying premiums or surrender the policy within the first five years, the money is moved to a discontinued policy fund and can generally be paid out only after the lock-in period ends. After five years, many plans allow partial withdrawals within set limits.
This means a ULIP is suitable only for money you will not need in the short term.
A simple example
Illustration only, not a quote.
Suppose ₹10,000 is available for investment after charges, and the NAV that day is ₹20. You get 500 units.
- If the NAV later rises to ₹25, your 500 units are worth ₹12,500.
- If the NAV falls to ₹15, your 500 units are worth ₹7,500.
The number of units stays the same; their value changes with the market. These numbers are only to explain the idea and say nothing about future performance.
Who might consider a ULIP?
- People with a long time horizon (10 years or more)
- Those who understand and accept market risk
- Those who want investment and life cover in one plan
If you cannot accept the possibility of losses, a traditional endowment plan or a term plan plus separate savings may suit you better. Tax treatment depends on prevailing tax laws and the regime you choose.
Which LIC plans are of this type?
LIC's unit-linked plans include LIC's SIIP (752), which offers a choice of four funds, and LIC's Index Plus (873), which offers two equity-oriented funds. See all of them on our unit-linked plans page.
Want help deciding if a ULIP fits your goals? Talk to us before you invest.