What Are The Top Disadvantages Of Ulips

What are the Top Advantages and Disadvantages of ULIP?

ULIPs stand out as a popular choice, offering growth opportunities, family security, and tax advantages.

Written by : Knowledge Center Team

2025-10-29

1909 Views

7 minutes read

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ULIPs are becoming more and more popular as investment options. They are popular due to many reasons. They are a combination of investment and insurance, all in one plan. They also offer multiple tax benefits. If you want to make your first investment, a ULIP could be the best choice as it offers a good amount of flexibility for minimizing risks.

However, before making the investment decision, there are numerous ULIP advantages and disadvantages that you must consider. This blog will provide you with an in-depth detail regarding the same. 

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 provide a lower sum assured than pure term insurance since a portion of the premium is invested. If securing your family’s financial future is your priority, term insurance might be a better choice.

  • Unlike passive investments, ULIPs require policyholders to monitor market trends and make funds 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), making ULIPs a tax-efficient investment plan.

  • ULIPs combine investment and insurance, requiring an understanding of fund NAVs, switching options, and associated charges, which can be overwhelming for new investors.

What is a ULIP?

A Unit-Linked Insurance Plan is a combination of life insurance and investment. A part of your premium is invested in funds of your choice, while another part goes towards a life insurance cover. You are allowed to switch and redirect your funds often in search of better returns or greater safety. You can invest in equity, debt, or balanced funds as per your risk appetite.

Disadvantages of ULIPs 

Like any other investment product, ULIPs come with their own set of disadvantages. Here are some of the disadvantages of ULIP that you could notice, which are important to know, especially if it’s your first investment.

  1. Complexity: Since a single ULIP is both a life insurance cover and an investment, it might 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 amount of charges involved might intimidate you as well. While being updated with your insurance premiums, you also need to keep track of 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.

  2. Costs: ULIPs generally have a lot of charges associated with them. In the beginning, these charges are more as they go towards policy administration and other aspects of managing your funds. With time your potential returns increase as well. However, it takes patience since initally, a considerable part of your premium is lost towards charges.

  3. Market Realities: One of the disadvantages of ULIP is that you earn less from the plan in the initial years because of the volatile market conditions, and you are still learning how to navigate it. You may or may not take risks when needed, prefer to stay rather safe and miss out on potential gains.

  4. Lock-in Period: ULIPs have a lock-in period of 5 years, before which you cannot withdraw your investments. Even if you surrender your ULIP within five years, withdrawal would have to wait until the lock-in period is over.

  5. Switching Charges: Most insurers will offer you free switches of your funds up to a certain point. However, after this point, switching is chargeable, and you really have to weigh your potential profits against the charges incurred.

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, policyholders must actively monitor market trends and adjust their investments accordingly. If you prefer a hands-off approach to investing, mutual funds with professional fund management might be a better choice.

Advantages of ULIP

Now that you have gained an understanding of how complex it can be to invest in a ULIP, there is a lot more that makes it even a good 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.

  1. Comprehensive Investment and Insurance Solution: Any investment product is complex, and once you get a proper idea about it, ULIPs can be your best friends. Integrating financial and investment products simplifies financial planning by eliminating the need to manage multiple instruments separately, saving both time and effort for investors.
  2. 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.
  3. Reduced Costs: The regulatory intervention by the IRDAI has significantly reduced the costs associated with ULIPs. By capping the charges, ULIPs have become more cost-effective, enhancing the overall return potential for investors and making them a more attractive investment option.
  4. Flexible Switching Options: Certain plans offer investors the flexibility 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.
  5. Long-Term Growth Potential: ULIPs come with a 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 their investment for the long term, 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.

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Did You Know?

The premiums paid towards ULIP can be utilised as a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act of 1961.

Source: ClearTax

ULIP 19.45

Conclusion 

ULIPs are not at all bad investment products if you know how to turn the disadvantages of ULIP around in your favour. Do solid research and invest in a comprehensive which offers multiple avenues and great flexibility. Canara HSBC Life Insurance plans offers a wide range of choices, such as  different funds and portfolio strategies to choose from. It also offers Return of Mortality Charges so that charges don’t affect your fund value. Additionally, there are also Loyalty Additions and Wealth Boosters for a cherry on top. So, what are you waiting for? The plan for fulfilling your dreams is just a few clicks away!

Glossary:

  1. Insurance Premiums: These are regular payments made by policyholders to their insurance providers in exchange for coverage. The amount of the premium is determined by factors such as the type of insurance, the level of coverage, and the policyholder's risk profile.
  2. NAVs (Net Asset Values): NAVs represent the per-unit market value of a mutual fund or ULIP. It is calculated by dividing the total value of the fund's assets by the total number of units outstanding.
  3. Lock-in Period: This refers to the duration during which investors are required to keep their funds invested in a financial product
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FAQ’s For Top Disadvantages of ULIPs

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, ULIPs provide flexibility in investment choices, tax benefits, and the potential for long-term growth.

The choice between ULIPs and 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.

Market analysts anticipate an annual return of 10-12% on a ULIP policy with a tenure of 10 years.

ULIP being a unique investment option offers a dual benefit of investment and insurance which makes it better in comparison to FDs. Moreover, flexibility to switch between different investment options as per the market fluctuations and tax savings are the advantages that outweigh disadvantages of ULIPs.

ULIPs pose a higher risk due to the mandatory five-year lock-in period, making it imperative to evaluate your financial capacity and objectives before investing. Thus, ULIPs are advisable for long-term investment strategies.

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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