Based on data compiled from the Insurance Regulatory and Development Authority of India (IRDAI), during FY14-24, the premiums received by life insurers in India, from unit-linked insurance plans (ULIPs), grew at a CAGR of 12.5 per cent, while the premium from plain-vanilla insurance plans grew at a slower 9.8 per cent. The growth in premium received during FY20-24, however, relatively slowed down to a CAGR of 10 per cent and 9.6 per cent for both the segments respectively.

While it is not advised to combine investments with insurance, it is unfortunately widely prevalent as observed from the faster growth in premium received from the unit-linked segment. ULIPs generally piggy-back on the demand for market-linked investment products. Interestingly, IRDAI even came up with a master circular dated June 19, 2024, forbidding insurers from advertising unit-linked or index-linked insurance products as investment products.

Though some ULIPs outperform their benchmark indices, post adjusting for fees and charges, which are typically higher than those charged in mutual funds, the returns stand diluted to such extent. And essentially, as has always been our take, a term insurance plus a mutual fund investment strategy ranks better than a supposedly two-in-one ULIP.

The Budget 2025 impact

We know what hogged the spotlight this budget – the more economical tax rates under the new tax regime. If any, the new tax regime significantly reduces the need to get oneself stuck with investments burdened with lock-in periods, especially the two-in-one market-linked instruments combining insurance and investments.

However, as per the rules in force, in the case of ULIPs, if the premium paid per year is more than ₹2.5 lakh, gains are taxed at 12.5 per cent beyond ₹1.25 lakh if the underlying investment is an equity instrument. Maturity benefits from ULIPs with premium up to ₹2.5 lakh, on the other hand, are fully exempted.

When to sell

People, sometimes, buy ULIPs keeping in mind certain financial goals like paying for their child’s overseas higher education, marriage, buying a car or a house, or as part of their planned retirement savings. Hence, the investor can consider exiting on meeting such goals or for want of liquidity.

Also, if one is stuck with a consistently-underperforming ULIP, and there is a clear opportunity cost with retaining the money in ULIPs, policyholders could look to exit and redeploy the capital elsewhere. Withdrawing without a redeployment strategy also defeats the purpose.

But importantly, the mandatory lock-in period of five years must be taken into consideration. Surrendering before the expiry of the lock-in period entails discontinuance and/or surrender charges which will be deducted from the fund value. As such charges usually decline with an increasing holding period, policyholders should time the exit appropriately to minimise the loss on this front. In any case, the proceeds will not be remitted before the expiry of the lock-in period.

Apart from this, if a deduction against income was claimed under section 80C, the proceeds from such surrender will be added back to the taxable income in the financial year in which such proceeds were received.

During periods of market rallies and particularly at market peaks (though difficult to judge), one can find opportune periods to exit their ULIPs, boosting the net returns and locking in on them.

However, it is important to ensure that an adequate life insurance cover is in place, as once a request for surrender or discontinuance is made, the insurance cover from the ULIP stands withdrawn.

Mis-selling

There are numerous cases where ULIPs are mis-sold as investment vehicles with the benefit of an insurance cover. In addition to that, when nearing the expiry of lock-in period, there is a good probability that policyholders might receive calls from sales representatives to switch to new fund offers (NFOs) by the insurance company. And it is more important to understand that the NFOs of the insurance companies are very different from that of mutual funds.

One must avoid getting distracted by pressures from such sales representatives and stick to his/her original plan. One’s own financial goal, risk appetite and assessment of the new product must be the only fulcrum for decision making in this regard.

Published on March 29, 2025