A ULIP is both insurance and investment, and it is usually worse at each than the two bought separately. That is not an opinion about sales practice. It follows from the charge structure IRDAI permits.
The rules changed in 2024. The IRDAI (Insurance Products) Regulations, 2024 were notified on 22 March 2024 and repealed the 2019 ULIP regulations. ULIP terms now sit in Schedule I of those regulations, with the Master Circular on Life Insurance Products of 12 June 2024 alongside. Older articles citing the 2013 or 2019 rules are quoting dead law.
What charges can a ULIP take from your money?
Ten heads are permitted, and each is capped. This is the whole product in one table.
| Charge | Regulatory cap | Applies to | Source |
|---|---|---|---|
| Premium allocation | 12.5% of annualised premium | Every premium paid | IRDAI Insurance Products Regulations 2024, Schedule I |
| Fund management | 135 basis points a year | Each segregated fund | Schedule I, cl. 2(A)(vi)(c)(II)(iii) |
| Fund management, discontinued policy fund | 50 basis points a year | Lapsed policies in lock-in | Schedule I, cl. 2(A)(vi)(c)(II)(iii) |
| Guarantee charge | 50 basis points a year | Funds with a guarantee | Schedule I |
| Policy administration | ₹500 a month, escalation up to 5% a year | Every policy | Schedule I |
| Switching | ₹500 per switch | Fund switches | Schedule I |
| Partial withdrawal | ₹500 | Withdrawals after lock-in | Schedule I |
| Miscellaneous or alteration | ₹500 | Policy changes | Schedule I |
| Mortality or morbidity | No fixed cap | The life cover | Schedule I |
| Rider charge or rider premium | One or the other, not both | Riders | Schedule I |
Look at the first row. On a ₹1,00,000 annual premium, up to ₹12,500 can be taken before a rupee is invested. Allocation and administration charges must be spread evenly across the first five years, with the highest year no more than three times the lowest.
How much return can a ULIP legally cost you?
IRDAI caps the reduction in yield. That is the gap between the gross return your fund earns and the net return you receive.
| Years since inception | Maximum reduction in yield |
|---|---|
| 5 | 4.00% |
| 6 | 3.75% |
| 7 | 3.50% |
| 8 | 3.30% |
| 9 | 3.15% |
| 10 | 3.00% |
| 11 to 12 | 2.75% |
| 13 to 14 | 2.50% |
| 15 and above | 2.25% |
Read the top row again. At the five-year mark the regulator permits your return to be cut by four percentage points a year. That is the ceiling, not the norm. But it tells you what the product is allowed to be.
Mortality cost, rider cost, guarantee charge and tax on charges may be excluded from that calculation. So the yield you actually feel can be lower than the table implies.
Compare that with an index fund plus a term plan. The fund charges an expense ratio. The term plan charges a premium. Both are visible. Our page on term insurance premiums shows what pure cover costs.
What happens if you stop paying a ULIP?
The lock-in is five consecutive completed years. Stop before that and the policy is discontinued.
Your fund value, less the discontinuance charge, moves to a discontinued policy fund. Risk cover and rider cover stop. Only the fund management charge may be deducted after that. The insurer must tell you within three months, and you get a three-year revival period.
That fund must pay a minimum guaranteed interest of 4% a year, under the Master Circular. Any excess income the fund earns “shall not be made available to the shareholders”. You receive the proceeds at the end of the revival period or the lock-in, whichever is later.
Discontinuance charges taper to nothing.
| Policy year of discontinuance | Annual premium up to ₹50,000 | Annual premium above ₹50,000 |
|---|---|---|
| 1 | Lower of 20% of premium or fund value, max ₹3,000 | Lower of 6%, max ₹6,000 |
| 2 | Lower of 15%, max ₹2,000 | Lower of 4%, max ₹5,000 |
| 3 | Lower of 10%, max ₹1,500 | Lower of 3%, max ₹4,000 |
| 4 | Lower of 5%, max ₹1,000 | Lower of 2%, max ₹2,000 |
| 5 and after | Nil | Nil |
One redeeming rule: if you revive within the lock-in, the insurer must add the discontinuance charge back to your fund.
You have 30 days to walk away
The free look period is 30 days from the date you receive the policy document, electronic or otherwise. That is Regulation 20(1) of the IRDAI (Protection of Policyholder’s Interests) Regulations, 2024. Before 2024 it was 15 days for most sales.
The refund must reach you within seven days of your request. A delay attracts interest at the bank rate plus 2%.
Promotional material must also carry a warning in bold on the front page. It says linked insurance products “do not offer any liquidity during the first five years of the contract” and that the policyholder cannot surrender or withdraw until the end of the fifth year. If your sales presentation skipped that line, that is the line.
What we are not telling you about ULIP tax
The taxation of ULIP proceeds is often summarised with a ₹2,50,000 annual premium threshold and a sum assured multiple. We could not verify either from a primary source, so we are not stating them.
What we can say is that the citation has changed. The Income-tax Act, 1961 was repealed on 1 April 2026. The provision on life insurance proceeds now sits in Schedule II of the Income-tax Act, 2025. Any article still citing section 10(10D) for this year is citing a repealed Act. Ask your insurer for the position in writing, and see our tax slabs page for the rest.
So who should buy a ULIP?
Very few people. If you want cover, buy a term plan. If you want growth, invest through a low-cost demat account or a mutual fund. The two together are cheaper, clearer and separable.
A ULIP can make sense if you are certain you will hold it beyond fifteen years, you value the enforced discipline, and you have already bought adequate term cover. Beyond fifteen years the yield cap tightens to 2.25%, which is a different product from the one sold at year five. If you are saving for a child, read how to plan for a child first.
Frequently asked questions
What is the ULIP lock-in period?
Five consecutive completed years. During that time you cannot surrender or withdraw. IRDAI requires that warning to appear in bold on the front page of promotional material.
What is the maximum fund management charge on a ULIP?
135 basis points a year for each segregated fund, and 50 basis points for a discontinued policy fund. The older split of 150 and 125 basis points by term is superseded.
What do I get back if I surrender in year three?
Your fund value less the discontinuance charge, moved to a discontinued policy fund earning at least 4% a year. You receive it at the end of the lock-in or the revival period, whichever is later. Not immediately.
Can I cancel a ULIP after buying it?
Within 30 days of receiving the document, yes. The refund is due within seven days, with interest at the bank rate plus 2% if the insurer is late.
Is a ULIP better than a mutual fund?
On cost, no. IRDAI permits a reduction in yield of up to 4% a year at year five. A mutual fund charges a disclosed expense ratio and nothing else. The ULIP adds life cover, which you can buy separately for less.
Sources
- IRDAI (Insurance Products) Regulations, 2024, Schedule I — irdai.gov.in
- IRDAI Master Circular on Life Insurance Products, 12 June 2024 — irdai.gov.in
- IRDAI (Protection of Policyholder’s Interests, Operations and Allied Matters of Insurers) Regulations, 2024, Regulation 20 — irdai.gov.in
- Income-tax Act, 2025 — egazette.gov.in
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