Should you choose a ULIP? Benefits, risks, and tax rules for 2026

A Unit Linked Insurance Plan (ULIP) may suit someone who needs life cover, accepts market-linked fluctuations and can stay committed for a long-term goal. It is not suitable simply because it combines two features. Before choosing one, assess the cover, funds, charges, five-year lock-in, withdrawal rules, and tax treatment together.

What is ULIP? How does it work?

A ULIP is a Unit-Linked Life Insurance product with two components: Life Insurance protection and market-linked fund allocation. After applicable charges are deducted, units are purchased in the fund or funds you select. The value of those units changes with the fund’s net asset value, so the policy’s fund value can rise or fall.

The exact split between Insurance cost, charges, and fund allocation is set out in the policy documents. Available funds may follow equity, debt, or mixed strategies. You may also be able to switch funds, redirect future premiums or make partial withdrawals, subject to the product’s terms. These options create flexibility, but they do not remove market risk.

Who may find a ULIP suitable?

A ULIP may be considered by a person with a genuine life-cover need, a goal extending beyond the lock-in period, stable premium-paying capacity, and willingness to accept market-linked outcomes. Suitability should be tested against the policy term, not only against the minimum period for which withdrawals are restricted.

• You can pay premiums for the chosen premium-payment term without disrupting essential expenses or emergency savings.
• You understand that life cover and fund value serve different purposes and may need to be evaluated separately.
• You can tolerate short-term declines and avoid reacting to every market movement.
• You are prepared to read the benefit illustration, policy wording, and charge schedule before buying.
• You have a nominee and will keep nomination and contact details current.
  
  

A ULIP may be unsuitable if you need near-term access to the money, want assured returns, cannot sustain premiums, or require higher life cover than the policy provides at an affordable premium. ‘Long term’ should reflect your actual goal and cash-flow capacity, not a sales phrase.

What are the potential benefits of a ULIP?

The practical benefits of a ULIP are integration, choice, and disciplined continuity. One contract can provide life cover while allocating money to market-linked funds. Depending on the product, a policyholder may select funds, change allocations, make top-ups, or access part of the fund value after locking in. Each feature remains subject to policy conditions.

1. Life cover alongside a market-linked fund value
The death benefit is determined by the policy terms and may not equal the displayed fund value. Review how the sum assured, fund value, premium history, and any withdrawals interact. A long-term goal does not replace the need to test whether the life cover is adequate for dependents.

2. Fund choice and switching
Fund options can help align the allocation with risk tolerance and time horizon. Switching can change the portfolio mix, but it cannot guarantee gains or prevent losses. Check the number of permitted switches, any charge, processing rules, and the risk profile of both the existing and destination fund before acting.

3. Goal-focused continuity
A regular premium schedule and restricted early access may encourage continuity. That discipline is useful only if the premium remains affordable. Missing premiums or discontinuing the policy can trigger consequences described in the policy, including movement to a discontinued-policy fund or reduced benefits, depending on the circumstances and product terms.

What risks and limitations should you assess?

The main risks are market fluctuation, inadequate cover, liquidity constraints, charges, and behavioural mistakes. The fund value is not assured, and a five-year lock-in does not mean that five years is an ideal holding period. A policy can also become unsuitable if income, dependents, goals, or risk capacity change.

• Market risk: NAV depends on the underlying assets and market conditions. Past fund performance does not predict future results.
• Liquidity risk: No liquidity is offered during the first five years, subject to the regulatory and policy framework. Partial withdrawals later may reduce the fund value and could affect benefits.
• Cover risk: The life cover may be lower than the family’s actual protection requirement.
• Cost risk: Mortality, policy administration, fund management, premium allocation, discontinuance, and other permitted charges may apply. Their amount and method vary.
• Decision risk: Frequent switching after market moves can lock in losses or disrupt a long-term allocation.

Which ULIP charges should you compare?

Compare charges by reading the product prospectus, benefit illustration, and policy wording together. Do not judge a policy from a single charge or a projected fund value. The effect of charges can vary by premium size, age, cover, fund choice, policy year, and product design.

Source: Product-specific definitions and rates must be verified in the current sales prospectus and policy contract.

How does the five-year lock-in affect access to money?

A ULIP does not offer liquidity during the first five years. This is a restriction on access, not evidence that a five-year horizon is automatically suitable. After the lock-in, partial withdrawals may be available only within stated limits and conditions. A withdrawal reduces the fund value and can affect future goal funding or policy benefits.

Before buying, keep a separate emergency reserve. Also ask what happens if premiums stop, whether revival is available, when surrender value is payable, and how a discontinued policy is treated. These answers should come from the current policy documents, not a verbal assurance.

What are the ULIP tax rules in 2026?

ULIP taxation depends on the policy’s issue date, annual and aggregate premiums, premium-to-sum-assured conditions, nature of the receipt, and the tax regime selected. Section 80C deductions are generally relevant only where the taxpayer uses the old tax regime and meets applicable conditions and limits. The new tax regime generally does not allow Section 80C deductions.

For ULIPs issued on or after 1 February 2021, Section 10(10D) maturity exemption is subject, among other conditions, to the aggregate annual premium threshold of ₹2.5 lakh across relevant policies and the premium-to-sum-assured test. Where exemption does not apply, tax treatment may follow capital-gains provisions. Amounts received on death remain exempt under Section 10(10D), subject to applicable law. Tax rules can change, so obtain advice based on your policies and tax regime.

Tax note: Tax benefits are subject to prevailing tax laws, conditions and amendments. This content is general information and is not tax advice. Consult a qualified tax professional.

How should you evaluate a ULIP before buying?

Start with the protection gap and goal, then test the product rather than beginning with a projected return. Ask for the customised benefit illustration under permitted assumptions and compare it with the actual premiums payable, death benefit, projected values, charges, and discontinuance outcomes. Projections are illustrations, not promises.

• Define the amount and duration of life cover your dependants need.
• Match the policy and premium-payment terms to the goal and income pattern.
• Check every fund’s objective, asset mix, risk rating and fund management charge.
• Read the year-wise effect of charges in the signed benefit illustration.
• Understand the five-year lock-in, partial-withdrawal limits, surrender, and revival rules.
• Confirm nomination, exclusions, claim requirements, and service channels.
• Review tax treatment for your issue date, total premiums, and chosen tax regime.

How can ABSLI help you review a ULIP?

Aditya Birla Sun Life Insurance Company Limited provides ULIP products and product documents through its official channels. If considering an ABSLI policy, use the current sales prospectus, policy wording, customised benefit illustration, and fund information to verify cover, charges, risks, and eligibility. Product names, features, and UINs should be inserted here only after LCMP confirms the current approved material.

What is the bottom line?

Choose a ULIP only when its life covers, market-linked structure, time horizon, costs, and access restrictions fit the same financial plan. It can support a long-term goal for an informed, risk-aware policyholder, but it is neither a guaranteed-return product nor a universal requirement. The right decision is the one you can explain from the policy documents.

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Also read

• What is a Unit Linked Insurance Plan? Meaning, charges, risks and tax rules
• How ULIPs can help in meeting long-term goals
• ULIPs vs endowment plans: kKey differences, returns and tax benefits
  
  

References

1. Insurance Regulatory and Development Authority of India, IRDAI (Insurance Products) Regulations, 2024 and applicable master circulars: https://irdai.gov.in/consolidated-gazette-notified-regulations

2. Income Tax Department, Circular No. 2/2022, guidelines under Section 10(10D): https://www.incometaxindia.gov.in/w/circular-no.-2/2022-guidelines-under-clause-10d-section-10-of-the-income-tax-act-1961

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

4. Income Tax Department, deductions and Section 115BAC overview: https://www.incometaxindia.gov.in/w/computation-of-tax-for-individual-1

5. Existing ABSLI article reviewed on 7 September 2026: https://lifeinsurance.adityabirlacapital.com/articles/wealth-insurance/why-you-must-invest-in-ulip-plans/