If you’ve ever sat through a bank meeting about “investment solutions,” chances are ULIPs came up. Unit linked insurance plans have been around for decades, and honestly, on paper, they sound like a “Buy 1 Get 1 Free” deal. But if you look at the portfolios of India’s most successful business families or high-net-worth individuals (HNIs), you’ll notice something strange: ULIPs are almost always missing.
Why is that? Let’s break it down.
What exactly are ULIPs?
Think of ULIP Plan as a hybrid product. Part of your premium goes toward life insurance coverage, and the rest gets invested in market-linked funds, including equity, debt, or a mix of both. You’re essentially getting two products bundled together: term insurance and mutual funds.
The concept emerged in the 1970s globally but really took off in India during the early 2000s. Insurance companies saw an opportunity to tap into India’s growing equity culture while offering the safety net of insurance.
How do they actually work?
When you pay your ULIP premium, here’s what happens:
A portion covers your life insurance (mortality charges). Another chunk goes to fund management and administration fees. Whatever’s left gets invested in funds you choose: equity, debt funds, or balanced options.
You’re locked in for five years minimum (that’s the regulatory requirement). After that, you can withdraw at the surrender value or let it run. The market performance determines your returns, minus all those charges we just mentioned.
So why do ULIPs exist in the first place?
They solved a real problem back in the day. Most Indians didn’t invest systematically. They’d buy traditional insurance policies for safety and maybe dabble in fixed deposits. ULIPs forced discipline because you had to keep paying premiums, which meant you were investing regularly whether you liked it or not.
For insurance companies, it was brilliant business. Long-term customer relationships, predictable revenue streams, and the ability to earn from both insurance and fund management sides.
Why does every bank seem to push them so hard?
Walk into any bank for a simple FD, and somehow the conversation shifts to ULIPs. There’s a reason for that.
The commissions are substantial. A bank relationship manager might earn 20–30% of your first year’s premium. Compare that to mutual funds, where the upfront commission has been banned since 2009, or term insurance, where commissions are far lower. For the person sitting across from you, selling a ULIP makes financial sense (for them).
Banks also have targets to meet, and insurance products carry hefty weightage in their performance metrics. It’s not malicious; it’s just how the system works.
The Advantages
Let me be fair here. ULIPs aren’t entirely without merit:
Tax benefits: Premiums up to ₹1.5 lakh qualify for 80C deduction, and maturity proceeds are tax-free under Section 10(10D), provided your annual premium doesn’t exceed ₹2.5 lakh.
Forced discipline: If you’re someone who struggles to invest consistently, that lock-in period ensures you stick with it.
Flexibility: You can switch between equity and debt funds without tax implications, which is genuinely useful during market volatility.
Transparency: Post-2010 IRDA reforms, ULIPs became much cleaner. You now know exactly what charges you’re paying.
The Disadvantages
High costs: Even after reforms, fund management charges, policy administration fees, and mortality charges eat into returns. You’re looking at total costs of 2–3% annually in many cases. Compare that to mutual funds at 0.5–1%.
Let me give you a real example: Say you invest ₹2 lakh annually for 20 years. With a ULIP earning 12% gross returns but charging 2.5% in fees, you’d end up with approximately ₹1.21 crore. The same amount in a mutual fund with the same 12% gross return but only 1% in fees would give you around ₹1.37 crore. That’s ₹16 lakh left on the table, just in charges.
Suboptimal insurance: The insurance cover in ULIPs is usually the bare minimum. HNI families need substantial coverage, and ULIPs simply don’t provide adequate protection relative to the premium paid.
Here’s a stark comparison: A ₹2 lakh annual premium ULIP might give you a cover of ₹20–25 lakh, but that same ₹2 lakh in a pure term plan could easily get ₹5 crore coverage for a 35-year-old. The insurance efficiency is about 20 times better with term insurance.
Complexity: You’re juggling insurance needs with investment goals. Both require different strategies, time horizons, and risk assessments. Mixing them creates confusion.
Liquidity constraints: That five-year lock-in is great for discipline but terrible if you need funds. Life doesn’t always wait for your ULIP to mature.
Average returns: After accounting for all charges, ULIP returns typically lag behind straightforward mutual fund investments. We’ve seen this play out over 15–20-year periods consistently. Industry data shows that over a 10-year period ending 2023, the average ULIP equity fund delivered around 9–10% CAGR, while top-performing diversified equity mutual funds delivered 14–15% CAGR.
Why HNI families stay away from ULIPs
When you’re managing significant wealth, efficiency matters. Every percentage point counts because you’re working with large absolute numbers.
HNIs prefer separation of concerns.
They buy pure term insurance for protection — often covers of ₹5–10 crore or more — at a fraction of what a ULIP would cost for the same coverage. Then they invest separately in instruments that align with their specific financial goals.
Cost consciousness increases with wealth.
A 2% annual drag might not seem significant on a ₹5 lakh portfolio, but on a ₹5 crore portfolio? That’s ₹10 lakh lost to charges every single year. Over 20 years at 12% returns, this cost difference translates to nearly ₹80 lakh in lost wealth. HNI families typically work with wealth managers who optimize for net returns, and ULIPs simply don’t make the cut after a cost-benefit analysis.
They need customization.
ULIPs offer limited fund options within a standardized framework. HNIs require bespoke portfolios — alternative investments, international exposure, structured products, real estate funds. ULIPs can’t provide that.
Tax planning is more sophisticated.
While ULIP tax benefits matter to salaried individuals maxing out their 80C limit, HNIs have already exhausted these buckets through PF, PPF, and other instruments. They’re looking at Section 54 for real estate, 54EC bonds, charitable trusts — strategies where ULIPs add no value.
What HNI families actually buy instead
Pure term insurance: Clean, simple, massive coverage at low cost. A 40-year-old can get ₹10 crore cover for around ₹60,000 annually whereas, to get that kind of insurance from a ULIP, you’d need to pay premiums of ₹8–10 lakh per year.
Mutual funds: Equity funds for growth, debt funds for stability, all with transparent, lower costs. They build diversified portfolios across market caps, sectors, and strategies.
Portfolio Management Services (PMS): For investments above ₹50 lakh, PMS offers active, customized management. Returns are after-fee, and the focus is purely on wealth creation. Many PMS offerings have delivered 15–18% CAGR over 10-year periods, significantly outperforming ULIPs.
Alternative Investment Funds (AIFs): Real estate funds, venture capital, long-short equity strategies. These aren’t correlated with traditional markets and provide genuine diversification. Some top-tier AIFs have generated returns of 18–25% CAGR, though with higher risk and longer lock-ins.
Structured products: Market-linked debentures, principal-protected notes. These offer defined risk-reward profiles for specific goals.
International investments: equity abroad, global mutual funds, foreign real estate. Geography diversification matters when you have substantial wealth. The Liberalized Remittance Scheme (LRS) allows individuals to invest up to $250,000 annually overseas.
Real assets: Commercial real estate, REITs, gold, even art and collectibles. Inflation hedges that ULIPs simply cannot provide. Quality commercial real estate in metro cities has historically delivered 8–12% annual appreciation plus rental yields of 6–8%.
The strategy is simple — get adequate insurance cheaply, then invest across multiple asset classes based on goals, risk appetite, and time horizon. Each piece serves a specific purpose rather than trying to be everything at once.
To be clear, ULIPs aren’t scams, and they’re not inherently “bad” products. For someone early in their career, struggling with consistency, or looking for a forced savings mechanism, they can serve a purpose. Many investors do build meaningful wealth through them.
But as wealth grows, so does financial clarity. The trade-offs that once felt acceptable start to stand out. What worked at one stage of life may no longer be the most efficient choice at the next. That’s why most HNI families move away from ULIPs over time. Not because the product failed, but because their financial needs evolved.
The insurance industry has improved ULIPs significantly over the years, but the fundamental structure remains which leads to a compromise on both insurance adequacy and investment efficiency for the sake of convenience. HNI families stopped making that compromise years ago and structured their portfolio accordingly.