What Are The Top Disadvantages Of Ulips

What are the Top Advantages and Disadvantages of ULIP?

Explore the advantages and disadvantages of ULIPs, compare them with SIPs, and understand if a ULIP suits your long-term goals

Written by : Knowledge Centre Team

2026-01-22

1921 Views

7 minutes read

Exit Pop Up

Live Life More Confidently

Get best insurance from our experts

Name is required Name should be Valid
Mobile Number is required Mobile Number should be Valid
DOB is required DOB should be Valid
Annual Income is required
Please tick to proceed further.

Thank you for your interest in our product. Our financial expert will connect with you shortly to help you choose the best plan.

Unit Linked Insurance Plans (ULIPs) have been gaining popularity as investment options in recent years. They are preferred for many reasons. ULIPs combine investment and life insurance in a single plan and offer various tax benefits under the Income Tax Act. If you are considering your first investment, a ULIP may be a suitable choice because it provides flexibility to manage risk and grow wealth over the long term.

However, before making an investment decision, it is important to understand the ULIP advantages and disadvantages that you must consider. This blog provides an in-depth look at both to help you make an informed choice.

Key Takeaways

  • ULIPs allow partial withdrawals after a 5-year lock-in period, providing financial flexibility in emergencies while keeping the core investment intact.

  • ULIPs usually offer lower life cover than term insurance, as part of the premium is invested. For pure protection, term insurance is more suitable.

  • Unlike passive investments, ULIPs require policyholders to monitor market trends and make fund switches when necessary. 

  • Investors can claim tax deductions on premiums up to ₹1.5 lakh under Section 80C, and maturity proceeds that are tax-free under Section 10(10D).

  • ULIPs require an understanding of fund NAVs, switching options, and associated charges

What is a ULIP?

A Unit-Linked Insurance Plan (ULIP) is a combination of life insurance and investment. Understanding ULIP plan advantages and disadvantages begins with knowing how the plan works. A portion of your premium is invested in funds of your choice, while the remaining goes towards a life insurance cover. You are allowed to switch or redirect your funds to seek better returns or greater safety. You can invest in equity, debt, or balanced funds as per your risk appetite.

Turn Small Investments Into Big Wealth with ULIP

Please enter correct name Please enter the Full name
Please enter valid mobile number Please enter Mobile Number
Please enter valid email Please enter Email
Consent is required

Enter OTP

An OTP has been sent to your mobile number

Didn’t receive OTP?

Application Status

Name

Date of Birth

Plan Name

Status

Unclaimed Amount of the Policyholder as on

Name of the policy holder

Policy Holder Name

Policy No.

Policy Number

Address of the Policyholder as per records

Address

Unclaimed Amount

Unclaimed Amount
Error

Sorry ! No records Found

.  Please use this ID for all future communications regarding this concern.

Request Registered

Thank You for submitting the response, will get back with you.

Thank You for submitting the response, will get back with you.

Disadvantages of ULIPs 

Like any other investment product, ULIPs have disadvantages. It is important to understand these aspects, especially if you are a first-time investor. Here are some of the disadvantages of the ULIP plan that you could notice, which are important to know, especially if it’s your first investment.

  • Complexity: Because a single ULIP combines life insurance coverage and investment, it can be difficult for new investors to understand. People are used to one instrument having a single focus and purpose, be it savings, investment, or insurance. Plus, the sheer number of charges involved might intimidate you as well.

    While your insurance premiums are being updated, you also need to monitor your fund NAVs and make constant decisions about switching, redirecting, and investing your funds in the right places to gain maximum returns out of your ULIP. All this makes ULIPs a complex investment option that requires a proper knowledge of the insurance market.
  • Costs: ULIPs generally have a lot of charges associated with them. At the outset, these charges are higher because they cover policy administration and other fund management services. With time, your potential returns increase as well. However, it takes patience, as a considerable portion of your premium is allocated to charges initially.
  • Market Realities: One of the disadvantages of ULIP is that you earn less in the early years due to market volatility, and you are still learning how to navigate it. You may or may not take risks when needed, but prefer to stay relatively safe, which can lead to missed opportunities.
  • Lock-in Period: ULIPs have a lock-in period of 5 years, during which you cannot withdraw your investments. Even if you surrender your ULIP within five years, you would have to wait until the lock-in period is over.
  • Switching Charges: Most insurers will offer you free fund switches up to a certain point. However, from this point, switching is chargeable, and you need to weigh your potential profits against the associated costs.
  • Lower Death Benefit Compared to Term Insurance: When comparing ULIPs to term insurance, a crucial drawback is the lower death benefit. While term insurance provides a high sum assured at a low premium, ULIPs offer a lower life cover since a portion of the premium is invested. If your goal is to secure your family’s financial future, a term plan might be a better option.
  • Active Management Requirement: ULIPs are not for passive investors. Since they offer multiple fund options and the flexibility to switch among them, policyholders must actively monitor market trends and adjust their investments accordingly. If you prefer a hands-off approach to investing, mutual funds managed by professionals may be a better choice.
trivia-img

Did You Know?

IRDAI has directed insurers not to market ULIPs as pure investments, mandating clear disclosure of insurance cover and risks


Source: TOI

Stay ahead of inflation

Advantages of ULIP

Now that you understand how ULIPs work, it is equally important to look at the factors that make them a viable long-term investment option. As there are two sides to every coin, there are two sides to ULIP, i.e., the ULIP advantages and disadvantages. Keep scrolling to understand the pros of investing in ULIPs.

  • Comprehensive Investment and Insurance Solution: Any investment product is complex, and once you have a clear understanding, ULIPs can be your best option. Integrating financial and investment products simplifies financial planning by eliminating the need to manage multiple instruments separately, saving investors time and effort.
  • Professional Fund Management: With ULIP, investors benefit from the expertise of professional fund managers who oversee the investment portfolio. These fund managers analyse market trends, select appropriate investment avenues, and make strategic decisions to optimise returns. They also provide guidance and support to investors throughout their investment journey.
  • Reduced Costs: The IRDAI’s regulatory intervention has significantly reduced the costs associated with ULIPs. By capping charges, ULIPs have become more cost-effective, enhancing investors’ return potential for investors and making them a more attractive investment option.
  • Flexible Switching Options: Certain plans allow investors to switch between funds without incurring additional charges. This feature allows investors to adapt their investment strategy according to market conditions or changing financial goals, ensuring optimal portfolio allocation and maximising returns over time.
  • Long-Term Growth Potential: ULIPs havea lock-in period, typically ranging from 5 to 10 years, which can be advantageous for investors with a long-term investment horizon. By committing to long-term investments, investors can capitalise on the power of compounding and give their investments sufficient time to grow.
  • Partial Withdrawal Facility: Emergencies can arise at any time. ULIPs offer a partial withdrawal facility, allowing investors to withdraw funds after a lock-in period (typically five years). This ensures liquidity while still keeping the core investment intact.
  • Tax Benefits: ULIPs offer tax benefits under Section 80C of the Income Tax Act, allowing deductions of up to ₹1.5 lakh on premium amounts. Additionally, the maturity proceeds are tax-free under Section 10(10D), provided certain conditions are met. This tax-efficient structure makes ULIPs a smart choice for investors looking to maximise their returns while minimising their tax liability.

Conclusion

To know whether investing in ULIP is good or bad, you must understand, both, its advantages and disadvantages.. With proper research and planning, a ULIP can serve as a comprehensive solution that combines long-term investment and life insurance with flexibility across fund options. We at Canara HSBC Life Insurance offer ULIPs with a wide range of choices with multiple fund choices  and portfolio strategies, allowing investors to align their investments with their risk appetite and financial goals. By choosing a ULIP that suits your financial objectives and investment horizon, you can work towards building wealth in a structured manner while staying protected.

Glossary:

  1. Insurance Premiums: The amount paid periodically by a policyholder to keep an insurance policy active and in force
  2. NAVs: The per-unit value of a ULIP fund, reflecting the market value of its underlying investments 
  3. Lock-in Period: The duration during which investors are required to keep their funds invested in a financial product
  4. Section 10(10D): An Income Tax provision that may exempt ULIP maturity proceeds from tax, subject to conditions
  5. Section 80C: An Income Tax provision that allows deductions of up to ₹1.5 lakh on eligible investments and premiu
glossary-img
Uncertain About Insurance

FAQ’s

ULIPs are unique investment options that offer a mix of investment and insurance, providing policyholders with the opportunity to grow their wealth while ensuring financial protection. Additionally, they also offer  flexibility to choose and switch between funds, tax benefits, and the potential for long-term growth.

The choice between ULIP vs mutual funds depends on your investment objectives, risk tolerance, and time frame. ULIPs offer combined life insurance and investment features, whereas mutual funds focus solely on wealth creation and you may require separate insurance coverage.

ULIP returns are market-linked and not guaranteed. Over a long-term horizon such as 10 years, returns may vary based on fund choice, market conditions, and charges, and can be higher or lower than expectations.

ULIPs and fixed deposits serve different purposes. ULIP, being a unique investment option, offers a dual benefit of investment and insurance, while FDs provide stable but lower, fixed returns with low risk. The better option depends on your risk tolerance and financial goals.

ULIPs carry market risk because returns depend on the performance of underlying funds. However, they are generally suitable for long-term investors who can stay invested beyond the mandatory five-year lock-in period and manage market fluctuations.

ULIP plan is a good for investment in terms of long-term financial goals of five years or more, as they combine life insurance cover with market-linked investments. They encourage disciplined investing, offer fund-switching flexibility, and may provide tax-efficient maturity benefits subject to conditions, making them appropriate for goals such as retirement planning or child education.

Some investors view Unit Linked Insurance Plans (ULIPs) as less suitable because combining insurance and investment can lead to higher costs, lower early returns, and limited insurance cover compared to keeping them separate. While ULIPs have evolved, certain concerns remain for some investors.

 

Key reasons why ULIPs is often considered a badinvestment choice:

 

  • High Costs and Lower Initial Returns: A large portion of early premiums goes towards charges, which can reduce returns in the initial years.

  • Limited Insurance Cover: ULIPs generally offer lower life cover compared to term insurance at similar premium levels.

  • Long Lock-in Period: A mandatory five-year lock-in restricts liquidity and early withdrawals.

  • Complexity: Multiple charges and fund management features can make ULIPs difficult to understand and compare.

  • Not Suitable for Short-Term Goals: ULIPs work best for long-term investing; early exit may reduce overall effectiveness.

  • Mis-selling Risk: Commission-driven sales may result in ULIPs being sold without proper need assessment.

ULIPs and SIPs cater to different financial objectives, and neither option is inherently right or wrong. When considering ULIP or SIP which is better, the answer depends on your goals. ULIPs are suitable for those who want to combine life insurance with disciplined, long-term (5+ years) and tax-efficient wealth creation. SIPs in mutual funds, on the other hand, are better suited for investors seeking higher liquidity, lower costs, and focused investment growth.

 

Which one should you choose?

  • Choose ULIPs if: You prefer a combination of life cover and long-term investing, or want tax-efficient planning for goals such as child education or retirement

  • Choose SIPs if: You aim for maximum investment flexibility, lower costs, high liquidity, and already have adequate term insurance in place

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.

Recent Blogs

What Is ULIP & Why Do People Invest in It?
18 Feb '26
917 Views
7 minute read
Understand ULIPs, how they work, their benefits, charges, tax rules, and why investors choose ULIPs for long-term wealth creation.
Read More
Ulip
Partial Withdrawal from ULIPs: Steps, Limits & Eligibility
11 Feb '26
3889 Views
6 minute read
ULIPs allow partial withdrawals under certain conditions. Learn the limits, steps and eligibility for partial withdrawals with Canara HSBC Life Insurance.
Read More
Ulip
How to Read the Benefit Illustration of Your ULIP Plan?
10 Jan '26
900 Views
7 minute read
Benefit illustrations are documents which give you a detailed idea about what is in store for you when you buy a ULIP plan. Here’s how you can read the benefit illustration of your ULIP plan.
Read More
Ulip
Understand Financial Jargon: Breaking Down Complex Terms
02 Jan '26
1266 Views
7 minute read
Confused by investment terms? Learn the meaning of key financial concepts, including Unit Linked Insurance Plans (ULIPs), and use a ULIP calculator to estimate returns easily.
Read More
Ulip
Switching ULIP Funds During Market Crashes: Easy Guide
31 Dec '25
830 Views
8 minute read
Protect your investment during downturns. Learn when and how to switch ULIP funds with a three-step playbook designed to minimise risk and safeguard growth.
Read More
Ulip
Single vs Regular Premium ULIP: Which Should You Choose?
26 Dec '25
1253 Views
6 minute read
Discover the difference between single-premium and regular-premium ULIP plans, and how to choose the right payment mode for your investment and protection goals.
Read More
Ulip
ELSS Tax Saving vs ULIP: Tax Benefits & Key Differences
25 Dec '25
8332 Views
17 minute read
Compare ELSS and ULIP to understand ELSS tax benefits, tax-saving potential under Section 80C, returns, lock-in period, and suitability
Read More
Ulip
ULIP vs Traditional Life Insurance: Key Differences
22 Dec '25
5884 Views
6 minute read
Understand the difference between ULIPs and traditional life insurance plans in terms of returns, risk, flexibility and suitability for long-term goals.
Read More
Ulip
How Market Performance Impacts ULIP Returns: A Complete Guide
22 Dec '25
1142 Views
7 minute read
Explore if ULIP returns are guaranteed and how market shifts affect them. Learn top strategies to boost your ULIP investment.
Read More
Ulip