ULIP Plan

How to Know Your Maturity Amount in a ULIP Plan?

Knowing how much your investments can grow over time helps you plan your finances more effectively and helps you work towards your financial goals. Various insurance and financial providers offer free online tool i.e. ULIP calculator to give you an estimate of the returns and maturity value, helping you make informed investment decisions.

What is ULIP (Unit Linked Insurance Plan)?

A Unit Linked Insurance Plan is a financial product that provides insurance coverage and market-linked investment in a single plan. When you pay the premium, one portion goes towards life insurance for family security after the insurance company deducts some charges like mortality, policy administration, etc. The remaining portion is invested in funds such as equity, debt or balanced funds based on your financial goals and risk appetite. The corpus can help you plan for important goals such as child’s education, retirement or wealth creation. ULIP Plans are meant for long term investment because of their strict 5 year lock in policy mandated by IRDAI, which makes them ideal for 10- 15-year goals. Additionally, ULIPs offer tax benefits under Section 123 (formerly Section 80C); maturity proceeds remain tax-free under Section 10(10D) of the Income Tax Act, 1961, subject to conditions like annual premium not exceeding ₹2.5 lakh for policies that are issued on or after February 1, 2021.

Types of Funds in a ULIP Plan

ULIP plans can also be classified on the basis of investment funds as well. Each fund carries a different level of risk and returns; depending on your financial goals, risk appetite and investment horizon, you can choose from equity, debt, balanced or other available fund options. Main types of funds available are: 

• Equity Funds: These types of funds mostly invest in stocks and equity-related instruments. They are aimed at generating long-term capital growth but also carry a high level of market risk. 

• Debt Funds: These types of funds invest in government securities, corporate bonds, and other fixed income instruments. They are meant for investors seeking stable returns and lower risk than equity funds. 

• Balanced Funds: These funds invest in a mix of equity and debt instruments and aim to provide balanced growth. The instruments are divided into parts; one goes on the safe side, and the other goes into the risky side of the market, thus balancing the risk and volatility. 

• Money Market Funds: These types of funds are short term instruments. Short term instruments are liquid and low-risk assets, such as Treasury bills and certificates of deposit. They are low-risk funds and thus offer limited growth as compared to equity funds.

Type 1 vs Type 2 ULIP Plans

ULIPs are classified based on their purpose and death benefit. Let us learn about them in detail.

ULIPs come in two types: Type 1 prioritizes life coverage with a higher payout on demise, while Type 2 emphasizes investment, offering the fund value on death. Both types allow customization for diverse financial goals.

New Age and 4G ULIP Plans

New-age ULIPs, often called 4G ULIP plans, have changed the game by cutting out the heavy costs that used to eat into your returns. Unlike older versions, these don't charge you for premium allocation or policy administration, meaning more of your money actually goes into the market. Features like mortality charges that are returned upon your policy's maturity help provide you with free life cover if you outlive the policy term. It is a much better investment strategy that concentrates on keeping your wealth intact, instead of filling your insurer’s pocket with high fees.

Why People are Choosing a ULIP Plan Right Now

According to the Allied Market Research report the global ULIP market hit $1.1 trillion in 2024 and is expected to hit $3.3 trillion by 2034 with a 10.5% CAGR over the period, according to 27 November 2025’s report. (Source: Allied Market Research's Unit-Linked Insurance Market report)

The life insurance market in India stood at $110.6 billion in 2024 and is still continuing to grow on a yearly basis. The number below from the IMARC group report shows the breakdown of where the market stands today and how the ULIPs are expected to grow going forward.

Source: IMARC Group's India Life Insurance Market report

What are the Features of ULIP Plans?

• Choice of Investment Funds: In a ULIP plan, you get to choose from different types of fund options available based on your risk appetite and financial goals. Options can include equity, debt, balanced or other fund options, each having a different level of risk and returns. 

• Flexible Premium Payment Options: ULIP plans offer different premium payment options like regular or limited premium payments. This structure allows you to choose a payment plan that suits your income and financial planning needs.

Types of Premium Payment Terms in a ULIP Plan

• Regular Premium: In this type, the policyholder pays the premiums at fixed intervals such as monthly, quarterly, half-yearly, or annually, as allowed in the policy. This supports disciplined investing. 

• Single Premium: Policyholders pay the entire premium in one go, i.e. in a lump sum at the start of the policy. This type suits individuals who have surplus funds available for investing. 

• Limited Premium: The policyholder pays premiums for a specific time period that is usually shorter than the overall policy term. The policy continues even after the premium payment period is over and the policyholder enjoys its benefits without any worries. 

  • Example for limited premium: Suppose you buy a ULIP Plan with 20 year policy term and 10 year premium payment term. 

    • You will have to pay premiums only for the first 10 years.

    • Even after you stop paying (after 10 years), your investments remain linked to the market and may keep growing for the next 20 years.

ULIP Charges to Know

ULIP Plans do have certain charges associated with them, these ULIP charges can be subdivided into multiple categories. Following are the ones you must know:

• Premium allocation charge: The fee charged by the insurance company for allocating the premium amount to various investment funds. Premium allocation charge ranges between 0-5% of the premium, but the newer ULIP plans come with almost 0 charges.

• Fund management charge: The fee charged by the fund manager for managing the investment portfolio of the ULIP. IRDAI has capped this charge at 1.35% per year. 

• Mortality charge: The fee charged by the insurance company for providing the life cover under the ULIP. There is no single percentage because it varies according to the plan.

What is Lock-in Period in ULIP Plans

According to the mandate set by IRDAI, the lock-in period for every ULIP sold in India is fixed at 5 years. Until that period ends, your fund value stays locked, you can not fully surrender or make partial withdrawals from ULIP investments

Rules for the Lock-in Period:

• There is no option of taking out or redeeming the fund value during this period 

• You are allowed to switch your money between funds of your choice which could be equity, debt or balanced funds during this time.

• Your life insurance coverage will continue as long as you continue paying regular premiums on time 

• If you discontinue the policy early, the money is transferred into a discontinuance fund and is released only after the lock-in ends. 

• After the 5 years are over, partial withdrawals become available, and the policy continues as usual with slightly reduced corpus.

How Does the Payout Work in a ULIP Plan in Various Situations

Consider the case of Rohan, a 35-year-old software engineer, who purchases a ULIP to build a corpus for his son's higher education and his own early retirement.

Basic Policy Details

How is Rohan’s Premium Invested?

When Rohan pays his monthly premium of ₹10,000 applicable charges are deducted before the remaining amount is invested in a ULIP 

The fund management charge (FMC) is assumed to be 1.35% annually. It is adjusted through the fund’s NAV rather than deducted upfront from ₹9,700
Note: All charge amounts above are just hypothetical and used only for illustration purposes. The actual charges vary by plan.

ULIP Plans Tax Benefits and Taxation Rules

Under the latest Income Tax Act, 2025 (which has replaced Income Tax Act, 1961) premium deductions previously which were claimed under Section 80C are now covered under Section 123 (Schedule XV), while the tax exemptions which were earlier claimed under Section 10(10D).

Below are the tax rules and regulations that a policyholder should be aware of:

ULIP Tax Benefits Summary

ULIP Tax Benefits Details

ULIPs are not fully tax-free, but they do carry solid tax benefits on both ends. The premium you pay qualifies for a deduction of up to ₹1.5 lakh a year under Section 123 (previously Section 80C), and the maturity payout is tax-free under Schedule II(2) of the Income Tax Act, 2025 [previously Section 10(10D)] as long as your annual premium stays at or below ₹2.5 lakh for policies issued after 1 February 2021. Cross that ₹2.5 lakh mark and the gains get taxed as capital gains. So a ULIP is better described as tax-efficient than fully tax-free. Keep your premium within the limits, and you hold on to most of these benefits without a catch. Below are the tax benefits of ULIP plan under each section explained in detail:

1. Tax Benefit Under Section 80C (now Section 123 of the Income Tax Act, 2025)

   ULIP premiums qualify for a deduction of up to ₹1.5 lakh in a financial year under Section 123 (formerly Section 80C). One condition applies here. Your life cover has to be at least 10 times your annual premium to claim the full amount. If the cover is lower than that, your deduction gets capped at 10% of the sum assured. This benefit is available only if you file under the old tax regime. If you have moved to the new regime, the 80C deduction on ULIP premiums does not apply.

2. Tax Benefit Under Section 10(10D) (now Schedule II(2) of the Income Tax Act, 2025)

   • Maturity proceeds from a ULIP are tax-free under Section 10(10D) (now Schedule II(2) of the Income Tax Act, 2025), subject to conditions.

   • For any policy issued before 1 February 2021, the maturity amount stays tax-free no matter how high your yearly premium was.

   • For policies issued on or after that date, the exemption holds only if your total annual premium stays at or below ₹2.5 lakh.

   • The death benefit paid to your nominee is always tax-free, regardless of the premium amount or when the policy was bought.

   • Watch out for the aggregation rule. The ₹2.5 lakh limit applies to the combined premium across all your ULIPs, not each policy on its own.

   • So if you hold two ULIPs bought after 1 February 2021 and their premiums together cross ₹2.5 lakh, both fall outside the exemption.

Are ULIP Plans Tax Free?

Budget 2025 cleared up a long-standing grey area around high-premium ULIPs. Earlier, there was confusion over whether the gains from these policies should be treated as income from other sources or as capital gains. The rules now state plainly that a ULIP which does not qualify under Schedule II(2) of the Income Tax Act, 2025 [previously Section 10(10D) of the Income Tax Act, 1961] is treated as a capital asset, and its gains are taxed as capital gains. These changes take effect from 1 April 2026 and apply to assessment year 2026-27 onwards.

Here is how the tax works for a ULIP that falls outside the 10(10D) exemption:

• If you hold the policy for more than 12 months, the gain is a long-term capital gain, taxed at 12.5% on the amount above ₹1.25 lakh.

• If you exit within 12 months, the gain is a short-term capital gain, taxed at 20%.

This brings high-premium ULIPs closer to how equity mutual funds are taxed. One advantage still sets ULIPs apart though. Switching between equity and debt funds inside the plan during the policy term does not trigger any capital gains tax. In a mutual fund, every switch counts as a redemption and can attract tax.

(Source: https://www.incometaxindia.gov.in/income-tax-act-2025)

GST Relief on ULIP Premiums

There is one more recent change worth noting. From 22 September 2025, GST on individual life insurance premiums, ULIPs included, has been brought down to NIL for premiums due on or after that date. This lowers the effective cost of holding the policy, since you are no longer paying tax on top of your premium.

ULIP vs. Mutual Funds vs. PPF vs. Term Insurance

Can I Cancel or Surrender My ULIP Plan?

Yes, you can surrender your ULIP before completing 5 years, but the money is not immediately available for withdrawal. ULIPs have a lock-in period of 5 years, so after surrendering or discontinuing, the amount is transferred to a discontinuance fund, where it remains until the lock-in period is completed. A discontinuance charge may also apply, subject to the limits prescribed by IRDAI. Once the lock-in is over, you can surrender the ULIP and receive the fund surrender value based on the applicable NAV on the date of surrender, without any charges. If you need only part of your investment, a partial withdrawal may be an alternative to closing the policy completely.

Common Riders Available With a ULIP Plan

Riders are small add-ons you can attach to your ULIP for a little extra premium. They cover gaps the base plan does not. Common ULIP plan riders are:

• Accidental Death Benefit Rider: Extra payout to your nominee if death is caused by an accident.

• Critical Illness Rider: A lump sum if you are diagnosed with a listed illness like cancer, kidney failure, or a heart condition.

• Waiver of Premium Rider: If you die or become disabled and cannot pay, the insurer pays your future premiums and the policy continues. Very handy in child plans.

• Permanent Disability Rider: Pays out if an accident leaves you permanently disabled and unable to earn.

• Income Benefit Rider: Your family gets a regular income for a set period instead of one lump sum.

Is ULIP Suitable for You?

How to Choose the Best ULIP Plans in India?

• List down your goal first: Saving for a child's education, a house, or retirement, each goal has its own time frame, and that should shape the plan you go for.

• Match the fund to your risk appetite: Go equity-heavy if you have years to ride out the market and can stomach the ups and downs. Lean towards debt if you want steadier, safer growth.

• Check the fund's track record: Look at how the insurer's funds have performed over 5 to 10 years, not just the last good year. Consistency matters more than one strong run.

Current ULIP Regulations and Market Scenario in India 

• Money in a discontinued ULIP does not sit idle. It moves to the Discontinuance Policy Fund, which carries a minimum guaranteed return of 4% a year, and only the fund management charge can be deducted from it during that period.  (Source: IRDAI (Treatment of Discontinued Linked Insurance Policies) Regulations, 2010)

• Switching between equity and debt inside a ULIP does not trigger capital gains tax. In a mutual fund, every switch counts as a redemption and is taxed on its own holding period. (Source: Income Tax Act treatment of ULIP fund switches)

• India's overall insurance penetration was flat at 3.7% of GDP in FY2024-25 and life insurance penetration slipped to 2.7% from 2.8%. The global average is 7.3%. (Source: IRDAI Annual Report 2024-25)

• Discontinuance charges on a ULIP are capped in absolute rupee terms, not as an open-ended percentage. The maximum is ₹6,000 if you stop in the first year, falling to ₹2,000 by the fourth year and nil from the fifth. (Source: IRDAI (Treatment of Discontinued Linked Insurance Policies) Regulations, 2010)

Documents Required to Buy a ULIP Plan

Before buying a ULIP plan the insurer will ask for a few basic documents that mainly cover KYC verification and proof of income so it's important to keep these documents handy at the time of purchase to avoid delays. The documents required are as follows: 

How to Buy a ULIP Plan Through Policybazaar