What are the 5 myths about investing in ULIPs?

A Unit Linked Insurance Plan (ULIP) combines Life Insurance cover with market-linked funds. It can support a long-term financial goal, but it does not assure investment returns and it is not suitable for every person. The right way to assess one is to separate the Insurance benefit, fund risk, charges, lock-in, and tax treatment, then read the policy-specific terms.

What should you know about ULIPs before examining the myths?

A ULIP has two connected parts. One provides Life Insurance cover under the policy terms. The other allocates part of the premium to chosen market-linked funds after applicable charges. The unit value can rise or fall, so the maturity or withdrawal value depends on fund performance and policy conditions. This distinction matters because several common claims are partly true but incomplete.

For example, switching from an Equity to Debt Fund may change the nature of market exposure, but it does not remove risks. Similarly, a death benefit is not simply the same thing as the fund value. Its formula is defined by the particular policy.

Myth 1: Are all ULIPs high-risk products?

Reality: Not every ULIP fund carries the same level or type of risk, but every ULIP is market-linked. Equity Funds can fluctuate more sharply, while Debt Funds may face interest rates and credit risks. Choosing a fund that matches your time horizon and risk capacity can manage exposure, not eliminate it. A buyer should look beyond labels such as “equity”, “balanced”, or “debt”. Check the fund objective, asset allocation range, risk disclosures and past portfolio information.

Also consider policy-continuance risk. If premiums become unaffordable, discontinuing a policy can affect Insurance cover and the timing or amount of proceeds under the contract. A practical test is to ask whether you can continue premiums through a weak market without needing the money for at least the lock-in period. If not, the product may not match your liquidity needs.

Myth 2: Does market performance decide the ULIP life cover?

Reality: Market movements affect the fund value, while the policy’s death benefit is calculated under a defined contractual formula. That formula may refer to the sum assured, fund value, premiums paid, or a combination, subject to policy conditions. It should not be assumed that every ULIP pays the same “higher of” formula.

Before purchase, review the death-benefit clause and ask for an explanation of how it works at different points in the policy. Check the treatment of partial withdrawals, unpaid premiums, discontinuance, and any exclusions. Nominee payout is a contractual Insurance benefit, not an informal promise that can be inferred from the fund’s performance alone.

Myth 3: Do ULIPs offer either low or high returns?

Reality: Neither description is reliable. ULIP returns are not guaranteed and vary with the selected funds, market performance, charges, premium timing, and holding period. Historic returns can provide context, but they cannot establish what a policyholder will receive in the future. A sound comparison starts with the insurer’s customised benefit illustration and the policy document. The illustration uses prescribed assumptions to show possible outcomes; it is not a forecast. Examine the projected fund value after charges, not only a headline growth rate.

Also check whether the Insurance cover is adequate for dependents instead of treating a possible maturity value as a substitute for protection planning. If a sales discussion uses a return figure, ask for its date, period, calculation basis, and the official fund fact sheet. Past performance should always be read with the warning that future performance may differ.

Myth 4: Are ULIP charges always hidden or always excessive?

Reality: ULIPs can include disclosed charges, but the amount and structure differ by product. Common categories may include premium allocation, policy administration, mortality, fund management, switching, partial-withdrawal, and discontinuance charges. Some policies may waive or return particular charges subject to stated conditions. Never assume that every charge applies, or that “zero charge” means the policy has no costs.

Use the product prospectus, benefit illustration, and policy document together. Identify when each charge is deducted, whether it changes by policy year or age, and how it affects units and fund value. For an accurate assessment, focus on the total policy outcome and life cover over your intended term, not on one charge in isolation.

Myth 5: Can you never exit a ULIP before maturity?

Reality: ULIPs can generally be discontinued or surrendered under the policy terms, but ULIPs have a five-year lock-in. If discontinuance occurs during the lock-in period, the treatment of fund value, charges, risk cover, and payment timing follows the applicable regulations and the policy contract. Proceeds are not ordinarily available immediately as unrestricted money during the lock-in.

After the lock-in, surrender and partial-withdrawal rules may offer more access, but limits and conditions remain policy-specific. Exiting can also end or reduce life cover and may affect goal funding. Read the discontinuance, surrender, and partial-withdrawal provisions before buying, especially if emergency liquidity is important to you.

What should you check before deciding whether a ULIP suits you?

A ULIP may be considered when you need life cover, accept market-linked outcomes, have a long horizon, and can maintain the premium commitment. Suitability depends on your protection gap, goals, cash flow, risk capacity, and existing arrangements. Use this checklist before signing the proposal form:

• Define the financial goal, amount required, and time available.
• Calculate the life cover your dependents need and check whether the proposed sum assured is sufficient.
• Select a fund based on risk capacity and horizon, not on recent returns.
• Review every charge and the net values in the customised benefit illustration.
• Understand switching, premium redirection, partial withdrawal, discontinuance, and surrender rules.
• Read the death-benefit formula, exclusions, nomination details, and claim requirements.
• Confirm the tax position for the issue date and premium profile with a qualified tax adviser.
• Complete disclosures accurately and keep the policy document and communications.

How can ABSLI help you evaluate a ULIP?

Aditya Birla Sun Life Insurance Company Limited provides ULIP and policy information through its official website and product documents. If you are considering an ABSLI ULIP, use the applicable product brochure, customised benefit illustration, policy document, and latest fund fact sheets. Product features and eligibility vary, so verify the current version and UIN before purchase.

This section is informational. It is not a recommendation to buy a particular plan or select a particular fund.

What is the key takeaway?

ULIP myths often turn conditional facts into absolutes. A ULIP is neither automatically too risky nor automatically rewarding. Its suitability depends on your need for life cover, ability to stay invested, fund choice, charges, and policy terms. Judge the complete contract and its fit with your finances, not a slogan or isolated return figure.

Also read

• What is a Unit Linked Insurance Plan? Meaning, charges, risks, and tax rules
• How is a ULIP premium utilised?
• What should you know before investing in a ULIP?
• How can you switch between equity and debt funds in a ULIP?
  
  

References

1. IRDAI, Master Circular on Life Insurance Products, 12 June 2024. https://irdai.gov.in/document-detail?documentId=4942918

2. Income Tax Department, Exempt Income, Section 10(10D). https://www.incometaxindia.gov.in/w/exempt-income

3. Income Tax Department, FAQ on life-insurance maturity receipts. https://www.incometaxindia.gov.in/w/are-receipts-from-life-insurance-policies-on-maturity-along-with-bonus-taxable-

4. ABSLI, current source article audited for this refurbishment. https://lifeinsurance.adityabirlacapital.com/articles/wealth-insurance/5-myths-about-investing-in-ulips-and-reality/

5. ABSLI, ULIP product information and current product documents. https://lifeinsurance.adityabirlacapital.com/ulip-plan/