ULIP

A ULIP, or unit-linked insurance plan, mixes life cover with investment in market-linked funds inside a single policy. Part of your premium buys cover, the rest is invested after several charges.

How a ULIP works

Each premium is split: a slice pays for life cover, and the remainder buys units in funds you choose, much like a mutual fund, with a five-year lock-in. Your investment value rises and falls with the market. Over the years the insurer deducts charges, for fund management, administration and the cost of the cover itself, before your money is invested, which is the main drag on returns.

The two-jobs problem

Because a ULIP tries to insure and invest at once, it often does neither as well as a focused product. The life cover is usually modest relative to the premium, and the layered charges pull down the market return compared with a low-cost mutual fund. Newer ULIPs are cheaper than old ones, but the structure still bundles two decisions that are usually better kept apart.

What most people do instead

The common advice is to separate the jobs: buy cheap term insurance for a large cover, and invest the rest in a plain mutual fund, typically through a SIP. You get bigger protection and clearer, lower-cost investing, and you can change either one without disturbing the other. See why bundling insurance and investment rarely wins.