What Is the Structure of a ULIP? Clearly Explained.

2025-07-21

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ULIPs are structured to provide both insurance protection and investment opportunities. They combine life cover with market-linked investments, making it important for investors to understand how they work before committing funds.A ULIP plan not only gives you the advantage of both investment and life insurance but also lets you save tax.

However, before plunging into investing in a ULIP, make sure you understand how it works and what are its various components. This can help you utilise the features of this investment product to meet your financial goals in tune with your risk appetite as well as get adequate protection for life. Let us take a look at how a ULIP is structured to get a better idea.

Key Takeaways

ULIPs combine investment and life insurance in a single plan, offering dual benefits under one policy.
The policy comes with a 5-year lock-in period and offers tax benefits under Section 80C and 10(10D).
Your premium is split between insurance coverage and market-linked investments in equity, debt, or balanced funds.
Multiple charges apply, including premium allocation, fund management, mortality, switching, and policy administration fees.
ULIPs offer flexibility through fund switching and premium redirection based on market trends and evolving life goals.

Basic Features

ULIPs are market-linked products that invest the premium paid by you across varied funds ranging from equity to debt, as well as balanced, in tune with your risk profile. Each policyholder is allocated units in accordance with the amount invested by them. You can switch between these funds in accordance with the risk you are willing to take.

Upon maturity, the total value of all units spread across various fund choices made by the investor during policy term is paid out. In the event of the death of the policyholder, the nominee receives the death benefit which may either be the fund value, sum assured, a combination of both or 105% of the premiums paid till the time of death.

A part of the premium of your ULIP plan is also invested towards providing a risk cover for your life in the form of life insurance. ULIPs also come with a 5 year lock-in period, which makes them a long-term investment.

Charges Associated With ULIP

Even before the premium is directed towards investment and insurance, it is adjusted for charges as mentioned in the policy purchased by you. Here are a few:

Premium allocation: A fixed percentage of the premium paid towards your ULIP is deducted as fees for allocating the premium such as commission or renewal charges among others. Premium allocation charges decrease after the initial few years of policy purchase and are dependent on the frequency of premium payment as well as the type of premium chosen.
Fund management: A ULIP plan invests money across various funds as specified by the investor and thereby charges towards managing these funds are deducted from the net asset value (NAV) of the fund. A maximum of 1.35% of the fund value is allowed to be charged towards managing a fund annually. Equity fund management attracts higher charges as compared to debt or balanced funds.
Mortality fee: A mortality fee is to be paid every month towards recovering the life insurance cover of your ULIP. Several factors such as the sum assured, age of the policyholder, medical history etc play a crucial role in determining the charges. Units of the funds invested under the ULIP are decreased in proportion with the charges as per your policy.

Switching charges: A ULIP plan allows you to switch between different funds as per your investment goals and market conditions. This offers you the flexibility to grow your wealth as per your comfort. While switches might be unlimited for some ULIPs, others charge you for a switch after you have exhausted the maximum limit. Depending on what your policy entails, you will have to pay a fee for making a switch beyond free switches allowed by your ULIP.
Premium redirection: Let us say you have chosen your premium to be invested in fund A. However, as your financial goals near you might want to move to fund B, which is a debt-oriented fund as opposed to the equity fund that you are invested in. ULIPs allow investors this facility, also known as premium redirection, for a limited number of times. A fee is levied towards redirecting your premium as per your ULIP policy.
Policy administration: A flat fee is charged for the maintenance of your ULIP such as documentation, sending premium intimation or policy revival notice. These charges are also referred to as policy administration charges.

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Despite all these deductions, a ULIP is a preferred investment choice that provides you with the benefit of life insurance along with investment and tax-saving.

Did You Know?

Starting April 1, 2026, any ULIP policy with annual premiums over ₹2.5 lakh will be subject to tax on the returns earned.

Source: Upstox

Discontinuing the ULIP: ULIPs come with a mandatory lock-in duration of 5 years. During this period, if you either surrender your policy or do not pay the premium, your investment is moved to a discontinuance fund. IRDA has prescribed discontinuance charges for ULIPs in such situations, which are similar across all insurance providers.
Partial withdrawal: Once you have completed 5 years of your ULIP, you can withdraw some money from your corpus. Depending upon your insurance company, you might be allowed a limited number of such partial withdrawals. After which, an upfront fee is charged towards making a partial withdrawal. Some ULIPs might allow unlimited withdrawals as well.
Miscellaneous charges: Apart from all these charges, there might be some other fee to be paid as per specifications of your ULIP plan.

Conclusion

ULIPs combine life cover with investment features, offering tax benefits under Section 80C and 10(10D) if conditions are met. They can be used to plan for goals such as retirement, children’s education, or other long-term needs. Investors should evaluate charges, flexibility, and their own risk appetite before opting for a ULIP.

Glossary

Market Sentiment: The overall mood or tone of investors in the market, driven by news or emotions, influences buying and selling.
ULIP Schemes: A financial product combining life insurance and market-linked investments with tax benefits.
Portfolio: A mix of financial assets like stocks, bonds, and funds owned by an individual to grow wealth or manage risk.
Equity: An ownership share in a company, often purchased as stocks, offering growth potential but with higher market risk.
Debt Funds: Investments primarily in fixed-income securities like government or corporate bonds, ideal for stable, low-risk returns.

FAQs

The fund value of ULIP refers to the total premium value invested in various funds. The formula to calculate it is as follows:

Fund Value = Total Number of units under a policy x Net Asset Value

Since ULIP has a 5-year lock-in period, you are eligible for a tax deduction on the premium only if you have paid it for 5 consecutive years.

Yes! According to Section 112A of the Income Tax Act, if you hold a ULIP with a premium of less than ₹2.5 lakhs for more than a year, you will have to pay 12.5% tax on the profits during withdrawal. This will come under the head Income from Capital Gains. However, you can get an exemption of up to ₹1.25 lakhs annually under Long Term Capital Gains.

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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