ULIP Detailed Guide
How a unit-linked insurance plan works — charges, funds, units and NAV — and IRDAI's rules on the five-year lock-in, partial withdrawals, discontinuance, revival and benefit illustrations.
Cover and investment in one policy
A unit-linked insurance plan (ULIP) combines life cover with investment in market-linked funds. After charges, including the mortality charge that pays for the life cover, the rest of the premium is invested in equity, debt or balanced funds chosen by the policyholder. The investment risk rests with the policyholder: the fund value moves with the market and is not guaranteed.
Units and NAV
Money invested buys units in the chosen fund. Each unit is priced at the fund's net asset value (NAV), calculated daily as total assets less total liabilities, divided by the units outstanding. The policyholder's fund value is the number of units held multiplied by the NAV.
Lock-in, withdrawals and discontinuance
A ULIP carries a five-year lock-in. A policyholder may stop paying premiums or ask to surrender earlier, but the money is paid out only after the lock-in ends. Partial withdrawals are allowed only after the lock-in, and a withdrawal cannot be so large that it ends the policy; other limits are set by the product. Policy loans are not available under ULIPs.
If premiums stop during the lock-in, the fund value moves to a discontinued policy fund and the life cover ends. That fund must earn at least 4% a year, which is a minimum and not a fixed rate. The policy can be revived within three years of the first unpaid premium. If it is not revived, the money is paid out at the end of the lock-in, or at the end of the revival period if the policyholder had opted to revive and that date is later.
Illustrations, regulator and tax
A benefit illustration must show projected values at two assumed gross investment returns, 4% and 8% a year. These are standard assumptions that make illustrations comparable; they are neither guaranteed nor a forecast.
ULIPs are insurance products regulated by IRDAI under the IRDAI (Insurance Products) Regulations, 2024 and the Master Circular on Life Insurance Products of 12 June 2024; SEBI regulates mutual funds. A 2010 dispute between the two regulators was settled by the Securities and Insurance Laws (Amendment and Validation) Act, 2010, which confirmed the insurance regulator's jurisdiction.
Whether maturity proceeds or a withdrawal are tax-free depends on the exemption conditions, including the ₹2.5 lakh limit on yearly premium for ULIPs issued from 1 February 2021.
Rules at a glance
Premiums stop in the third year
Illustration: Neha pays two yearly premiums on a ULIP and misses the third. Her fund value moves to the discontinued policy fund and her life cover ends. She has three years from the date of that first unpaid premium to revive the policy. If she does not revive it, the money is paid to her when the five-year lock-in ends, having earned at least 4% a year in the meantime.
From premium to fund value
- Assumptions, for arithmetic only: a fund has total assets of ₹505 crore, liabilities of ₹5 crore and 20 crore units outstanding; a premium of ₹1,00,000 is paid and charges of ₹5,000 are taken before investment.
- NAV = (₹505 crore − ₹5 crore) ÷ 20 crore units = ₹25 a unit.
- Amount invested = ₹1,00,000 − ₹5,000 = ₹95,000. Units bought = ₹95,000 ÷ ₹25 = 3,800.
- At a later NAV of ₹30, fund value = 3,800 × ₹30 = ₹1,14,000. At ₹22, fund value = 3,800 × ₹22 = ₹83,600.
- Discontinuance: if ₹2,00,000 is credited to the discontinued policy fund and stays for 3 years, the minimum is ₹2,00,000 × 1.04 × 1.04 × 1.04 = ₹2,24,973 (rounded).
Result. The same 3,800 units are worth ₹1,14,000 at an NAV of ₹30 and ₹83,600 at ₹22. The NAVs are invented, not a projection; charges later deducted from units are ignored.
Key points
- A ULIP invests the premium, after charges, in market-linked funds; the investment risk is the policyholder's.
- Fund value = number of units × NAV.
- The lock-in is five years; partial withdrawals are allowed only after it.
- A ULIP discontinued in the lock-in moves to a discontinued policy fund earning at least 4% a year, and can be revived within three years.
- IRDAI, not SEBI, regulates ULIPs.
Common misunderstandings
- The 4% and 8% in an illustration are not what the fund will earn: they are standard assumptions, not a guarantee or forecast.
- The 4% on a discontinued policy fund is not a fixed rate: it is the minimum the fund must earn.
- The lock-in does not force premiums to be paid for five years: payment can stop, but the money is released only after the lock-in.
Questions people ask
Can a ULIP be surrendered in its third year?
The request can be made, but the money is paid out only after the five-year lock-in ends.
Does life cover continue after premiums stop in the lock-in?
No. When the fund value moves to the discontinued policy fund, the life cover ends.
Can a loan be taken against a ULIP?
No. Policy loans are not allowed under ULIPs. Partial withdrawal after the lock-in is a separate facility, within the limits the product sets.
What this lesson relies on
- IRDAI (Insurance Products) Regulations, 2024
- IRDAI Master Circular on Life Insurance Products (12 June 2024) — unit-linked products, discontinuance, benefit illustrations
- Securities and Insurance Laws (Amendment and Validation) Act, 2010
- Income-tax Act, 2025 — section 11 read with Schedule II
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.