5 Common ULIP Buying Mistakes You Must Avoid

Written by : Knowledge Centre Team

2026-07-29

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5 minutes read

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ULIPs are a popular financial instrument that comes with two-pronged benefits of insurance and investment. ULIPs can fulfil the goals of financial protection for one’s family as well as wealth creation.

However, it is important to ensure that a ULIP fits into your investment strategy before you make it a part of your financial portfolio. However, to make the most of your ULIP investment, you need to take care to avoid certain errors that might hamper your ability to maximise benefits. Before taking a look at errors, let's understand what is ULIP plan is, its types and benefits in detail.

5 Key Takeaways

ULIPs offer dual benefits of life cover and wealth creation through market-linked funds
You can invest in equity, debt, or hybrid funds based on your risk appetite
ULIPs provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act
Benefits like fund switching, partial withdrawal, and top-up enhance flexibility and control
Staying invested for the long term maximises returns and reduces the impact of charges

What is ULIP?

ULIP stands for Unit Linked Insurance Plan. It is a financial product that offers you life insurance along with investment opportunities. When you pay the premium, one part goes toward your life cover, and the other part is invested in funds of your choice.

You can choose to invest in equity funds, debt funds, or a combination, depending on your risk appetite. ULIPs help you build long-term wealth while ensuring your family’s financial protection in your absence. Your investment returns depend on the market performance of the funds.

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Benefits of Investing in ULIPs

Some of the benefits of investing in ULIPs are as follows:

Tax Benefits: You can claim deductions under Section 80C for the premium you pay. The maturity amount or death benefit received by your nominee may also be exempt from tax under Section 10(10D), subject to the terms of the Income Tax Act

Note: Tax benefits are subject to change in tax laws. Please consult your tax advisor
Market-Linked Returns: You can earn returns based on your choice of funds and market conditions. Equity funds may offer higher returns, while debt funds provide more stable growth
Long-Term Wealth Creation: ULIPs help you stay invested for long durations. This supports financial goals like your child’s education, home purchase, or retirement planning
Fund Switching: You have the option to switch between funds at any time. If the market outlook changes or your financial goals evolve, you can reallocate your money without any tax on the gains
Top-up Facility: You can increase your investment through top-up premiums. This lets you invest more when you have surplus money, without the need to buy a new policy
Transparency: ULIPs clearly list all the charges, like fund management and policy administration. This allows you to understand where your money goes and make informed decisions
Maturity and Death Benefits: If you survive the policy term, you receive the fund value as a maturity benefit. In case of your death during the policy, your nominee gets the higher of the sum assured or the fund value
Partial Withdrawals: After five years, you can make partial withdrawals from your ULIP. These withdrawals are tax-free and help you manage urgent needs or planned expenses

Common Errors To Avoid When Buying a ULIP

When purchasing a Unit Linked Insurance Plan (ULIP), many investors overlook certain key factors that can impact the returns and benefits they receive. While ULIPs offer the dual advantage of life insurance protection and market-linked investment opportunities, making uninformed decisions can limit their effectiveness.

Here are some of the most common mistakes to watch out for when buying a ULIP plan:

Not Taking Into Account Your Risk-Exposure: ULIPs are market-linked instruments, which means that you can benefit from exposure to equity for higher returns. However, it is advised to choose the allocation of funds in tune with your risk-taking ability as well as how far your life goals are. Do not randomly allocate funds in equities since higher returns come with proportionate risks as well. You can choose between equity and debt as per your preference, as well as switch from one fund to another if you are looking for safety. Be aware of the various choices available to you to allow for the flexibility of investing.
Stay Invested for the Long Run: This is one of the most important mistakes to avoid when buying a ULIP. If you stop paying the premium anytime during the policy period, the insurance coverage becomes null and void. If premium payment ceases before the 5-year lock-in period, you still won’t be able to withdraw it, and the amount payable at the end of 5 years will be computed on the net asset value of the year in which the premium was stopped. Also, various charges related to the policy will be deducted. Staying invested for the long run helps you average out the various charges as well as create a significant financial corpus.
Not Taking into Account Your Unique Goals and Objectives: A ULIP that suits one investor may not align with the goals of another. Choose a plan that aligns with your financial responsibilities, long-term plans, risk appetite and liquidity needs in the future. Go for a hybrid fund if you are looking for safe returns, or an aggressive hybrid fund if you are willing to take a risk in the equities market. It is advisable that you list your financial priorities before beginning your hunt for the right ULIP and then go about picking one that meets these requirements.
Failing to Account for ULIP Charges: Since ULIPs are a part-insurance and part-investment instrument, there are certain fees and charges that will be levied, in addition to the premium you pay. When choosing your preferred ULIP, it is essential that you take such charges into consideration while calculating your total outgo.

After the introduction of new guidelines from the Insurance Regulatory and Development Authority of India (IRDAI), investing in a ULIP has become even more cost-effective. This investment tool with a dual benefit of investment with insurance, now comes with reduced premium allocation, administration, fund management and administration charges. However, it is still crucial that you weigh the effect these charges will have on your finances and compare the charges levied across different plans.
Investing Only for Insurance Cover: It is always better to buy a pure life cover, such as a term plan, to protect you and your family from any uncertainties in the future. Not only do they come cheap, but they also provide coverage in tune with your requirements. Insurance cover in a ULIP is usually 10 times the annual premium paid by you. It may or may not be sufficient for you. Moreover, the insurance benefit is no longer available if you stop paying your premiums for any reason. Hence, it is not wise to think of a unit-linked insurance plan as a substitute for life insurance.

Final Thoughts

ULIPs are an alternative investment option that you can utilise as per your needs to create wealth for the long term. The Promise4Growth Plus Plan by Canara HSBC Life Insurance helps in how and where to invest your money, with flexible fund options and death benefits. You can also switch or redirect your investments based on your needs

So, whether you are looking to fund your children’s education abroad, save for your retirement or fulfil any other long-term goals that you may have, ULIPs can help you achieve them with ease.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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5 Mistakes to Avoid When Buying a ULIP Plan

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