what-should-you-do-with-the-ulip-funds-that-you-have

What Should You Do With the ULIP Funds That You Have?

Let’s learn how ULIPs can help you build long-term wealth, enjoy compounding benefits, save on taxes, and secure your family’s future 

Written by : Knowledge Center Team

2025-10-06

3438 Views

6 minutes read

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If you have invested in a ULIP (Unit Linked Insurance Plan), you’re already building long-term wealth with added insurance protection. To maximise the benefits of this plan, it’s essential to understand how compounding, tax benefits, and loyalty additions work over time. Before deciding to redeem or switch your ULIP funds, take a moment to revisit your original investment goals. Staying invested longer can help you unlock greater returns, maximise benefits, and move closer to your financial milestones.

Key Takeaways 

  • Long-term ULIP investments maximise the power of compounding.

  • Staying invested unlocks loyalty additions and wealth boosters.

  • ULIPs purchased before Feb 1, 2021, enjoy full tax benefits.

  • ULIPs combine insurance protection with long-term wealth creation.

  • Promise4Growth Plus by Canara HSBC Life Insurance supports legacy planning till age 100.

Do ULIPs Get the Benefit of Compounding?

Yes, ULIPs get compounding benefits so long as you don’t withdraw the money from them. Since the ULIP plan has a lock-in period of five years. So for the first five years, your investments will certainly compound. After the lock-in period, if you can continue investing or at least stay invested, the money will continue to compound.

Benefits of Compounding

The longer you hold your investment, the higher it can grow, thanks to compounding. Here is a short example that will help you understand how the effect of compounding increases with the investment term.

Raj and Rahul both decided to invest ₹1 lakh a year. Rahul withdrew his money after 10 years. While Raj kept his investment untouched and allowed the interest to be reinvested for 5 more years.

Basis

Rahul

Raj

Principal Invested

₹1 lakh

₹1 lakh

Time Invested

10 years

10 years

Period

10 years

15 years

Amount invested/ROI

₹ 10 lakh/ 8% P. A

₹ 10 lakh/ 8% P. A

Total (after 10 years)

₹15.65 lakhs

₹ 23 lakhs

You see, by keeping the money for an extra 5 years, you help Raj gain approximately. ₹7.5 lakh. This is the power of compounding

Before deciding what to do with your ULIP plan, you need to go back in time just a little bit and find the purpose for which you invested in ULIP.

Most of the investments are made to achieve some goal. Investments are made so that you can help yourself as your family to achieve your dreams and goals.

Unit linked insurance plan is one of the best investments for you if you want to achieve a long-term goal. If you stay long enough, it can help you create a good corpus that is sufficient to achieve various milestones. You should thus be able to link your investments to your goals.

These can be the following:

  1. Buying a Car
  2. Buying a new house
  3. Taking care of the child’s education
  4. Child’s marriage
  5. Creating a retirement corpus

If your ULIP investment has made enough, then you can use the money to achieve these milestones listed above, or you can move further with the policy to achieve another goal.

What are the Benefits of Buying a ULIP other than Returns?

Another big reason that you should continue holding your ULIP plan is that there are certain benefits that are term-specific. That is, these will be available to you only when you stay invested for the long term.

  1. Loyalty Additions: This is the bonus you receive for staying invested for a long time. Think of it as you being rewarded by the insurance company for continuing with their plan.

    • Extra units are added to your fund after every 5th year till the time of your premium payment duration.
    • Loyalty additions are calculated on the average value of the fund for the past 60 months.
    • A percentage of this average fund value is added to your fund as a loyalty bonus.
    • Loyalty addition is available between 0.25-0.5% of the average fund value.
  2. Wealth Boosters: This helps increase your fund value by adding additional units without any charge.

    • These are first added 10 years after the policy has started
    • After the 10th year, these are added every 5th year
    • The range of wealth boosters varies from 0.5%-5.5%.
    • The wealth booster is based on the average of your fund value for the last 60 months.

Other Reasons to Continue with Your Old ULIPs

Not only bonuses, but other reasons also suggest that you should continue to hold your ULIP plans. These are:

  • Lower Mortality Charge: The mortality charge is the amount that you have to pay for your insurance coverage. The mortality charges are deducted from your fund’s value.
    These increase with age. So, if you do not continue with your existing ULIP and buy a new plan, you will incur a higher mortality charge.
  • Higher Fund Value: In ULIPs, a fund is created. As you invest in different assets, your fund’s value increases. The premiums that you pay in ULIPs are invested in different funds. These funds are linked to the market and can grow with time. The longer you hold, the more your fund value can increase, as risks also get minimised in the long run.
    On the other hand, if you look for another ULIP or any other investment, then your fund value will not be that much.
  • Power of Compounding: The effect that the power of compounding has on your investment gets stronger with each passing year. Even regular investments of small amounts can be accumulated into a huge fund in the long run.
    In compounding, the interest your investment earns is reinvested. The next time, you will earn interest on the existing interest as well.
  • Tax-Exemption: If you don’t want to continue with your ULIP, you will have to find another source to invest your money in. Finding the right source can take some time, as proper research should be done and many procedures are involved.
    Also, it becomes harder to invest the large funds from old ULIPs in a tax-exempt investment.

Tax-Exemption in Old ULIPs vs New ULIPs

After 1st February 2021, there have been several amendments made to ULIP through the Finance Bill. This has changed the taxation of ULIPs.Here’s what changed

  1. Taxes on Premium

    • ULIPs you had bought before 1st Feb 2021 will continue to have the same benefits as before.
    • The total premium for all the ULIPs you have bought after 1st Feb 2021 will be exempt from tax only up to ₹ 2.5 lakhs.
    • The ULIPs which fall beyond this investment ceiling will have taxable maturity values and withdrawals.
  2. Tax Treatment Above ₹ 2.5 Lakh

    • If your ULIP funds constitute more than 65% of equity, then it will be taxed as an Equity Mutual fund.
    • In the case of indirect equity investment, at least 90% of the funds should be in equity.
    • If these conditions are not met, then your ULIP will be charged as a debt Investment (Section 112).

The death benefit has remained unaffected in this budget. Thus, the amount that your family members will receive after your death will remain exempt from tax. Thus, the exemption u/s 10(10)D remains valid.

Thus, with all the points stated in the article, it becomes clear that if you currently possess a unit-linked insurance plan, then you should hold it further.

Staying invested in your ULIP plan can not only increase your corpus and give you compounding benefits but will also prove good taxation-wise. ULIPs purchased before February 1st, 2021, will still have tax benefits.

Thus, investing in ULIP for the long term can be a beneficial investment that can help you achieve your goals and, at the same time, provide your family with financial security.

Note: Tax benefits are subject to change in tax laws. Please consult your tax advisor.

Go Long Term with Promise4Growth Plus

Promise4Growth Plus by  Canara HSBC Life Insurance gives you the power to build long-term wealth while securing your loved ones’ future. With the option to stay invested up to 100 years of age, it is a smart plan to fulfil your life’s biggest promises.

  • Pay a Premium for a Limited Time: You can choose to pay for a few years with limited premium payment options. The policy benefits continue throughout the term.
  • Leave a Legacy: Promise4Growth Plus helps you build wealth gradually. You can pass on the maturity or death benefit to your children or grandchildren and create a meaningful financial legacy.
  • Flexibility with Withdrawals: While staying invested for the long term, you can access your funds through tax-free partial withdrawals after the five-year lock-in period. This helps you manage changing financial needs with ease.

Invest for Long-Term to Maximise Growth

Long-term investment offers better growth to your savings. ULIPs give you the opportunity to use this long investment period to its full potential. With ULIPs, you can maximise your returns with equity funds and bonuses. Additionally, the investment can remain entirely tax-free.

So, the ULIPs tick all the checkboxes for the wealth-maximising investment plan.

Conclusion

Staying invested in your ULIP helps you maximise growth through compounding, tax benefits, and long-term bonuses. Plans like Promise4Growth Plus by Canara HSBC Life Insurance let you invest till 100 years of age, offering flexibility, protection, and legacy planning. The longer you stay, the more your wealth grows, and you secure your future the smart way.

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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