ULIP: What It Is and Why Most Investors Should Avoid It

ULIP (Unit Linked Insurance Plan) combines life cover with market investment in a single product. On paper: convenient. In practice: insurance companies take 2-4% annually in charges that mutual funds don't. After Finance Act 2021, ULIPs above ₹2.5L premium also lost their tax exemption. Yet agents still sell it aggressively because commissions are 20-40% in year 1.

Where ULIP charges go in Year 1: You pay ₹1L as ULIP premium. Premium allocation charge (PAC): 5-12% = ₹5,000-12,000 taken off before investing. Balance ₹88,000-95,000 invested in fund. From this: mortality charge (cost of life cover, say ₹2,000 for ₹10L cover). Fund management charge: 1.35% of NAV annually. Administration charge: ₹100-500/month. Net investment working for you: ₹85,000-90,000 out of ₹1,00,000 paid. Year 1 effective return: must be > 15-20% just to break even. Term + MF vs ULIP comparison: ₹1L per year. ULIP route: ₹1L into ULIP. After charges (~3% annually): effective return 9-10% on invested corpus. After 20 years: ₹40-45L (approximately). Term + MF route: ₹8,000 for ₹1Cr term insurance. Remaining ₹92,000 into direct equity MF (no agent commission). Return 12-13%. After 20 years: ₹88-100L.