ULIPs vs term insurance and mutual funds: A detailed comparison

Unit Linked Insurance Plans (ULIPs) combine life insurance with investment, but many experts recommend term insurance or mutual funds instead, the Hans India reports. When a policyholder pays a premium, the insurer first deducts multiple charges before investing the remainder in debt, equity, or hybrid funds. ULIPs come with a mandatory five-year lock-in period during which funds cannot be withdrawn.

ULIP charges are a key drawback. The premium allocation charge is capped at 12.5% by IRDAI, so if a person pays Rs 1 lakh and the charge is 5%, only Rs 95,000 is invested. The policy administration charge cannot exceed Rs 500 per month (Rs 6,000 per year), and the fund management charge is capped at 1.35% of fund value per year. These deductions reduce returns significantly compared to mutual funds, where the entire amount is invested from day one, the report notes.

From an insurance perspective, term insurance offers far higher cover at a low cost. A healthy salaried individual can get a term plan worth Rs 2 crore for an annual premium of Rs 17,000 to Rs 20,000. In contrast, a ULIP's life cover is linked to the premium, typically 7 to 10 times the annual premium, which may be insufficient for most families. A person choosing between ULIP, term insurance, and mutual funds should weigh the charges, investment flexibility, and insurance needs.