In ULIP, the insurance company is investing your premium in a mix of equity & debt instruments as per your mandate. ULIP policy can give better returns compared to other types of policies discussed above.

But there are many charges which are deducted from your policy, which will reduce your effective return.
Let us see the charges.

Premium allocation charges – The charges are normally 4%-5% in first few years and 2%-3% after that. If you are paying a premium of 1 Lakh per annum, Rs. 4000-Rs.5000 would go towards premium allocation charges.

Policy Admin charges – Now a days, companies charge Rs. 40- Rs. 500 per month towards policy admin charges. These charges are deducted by cancelling your units.

Mortality Charges – These charges are towards providing life cover in ULIPs. Higher the age, higher the charges.

Surrender Charges – If you surrender the ULIP in first 5 years, the charges vary from 1st to 5th
Now if you buy a policy for a 10 years term, approximately 10% of the premium goes towards charges. How can you expect better returns if 10% of your premium is already deducted? year.

In ULIPs, you will not lose the premium paid, if you stop paying the premium within 3 years. The fund value will be moved to discontinuance fund and it will be payable to you on completion of 5 years from the start of the policy. During this period, you will get around 4% returns on the fund value.
If you want to surrender the policy after 5 years, you will get the fund value immediately.
Since these charges are deducted.

Exit route from ULIP
If you are not happy with your ULIP and if you want to exit from the policy, it is possible only after 5 years. Till then, your investment is locked. This is the biggest drawback of ULIP policies. Few companies are now offering ULIPs without any additional charges. But this 5 year lock in period makes them also unattractive. If you are investing in a mutual fund and if it is not performing, you can easily move to another fund.

If all insurance policies are bad, which one should I buy?
Coming back to the story of Arun, example quoted on this article, was there any alternate, available to Arun, to insure life at a lesser premium?

Yes. He could have opted for a Term Insurance policy.