‘One of the most damaging mistakes…’: What insurance agents won’t tell you about Ulips

Unit-linked insurance Plans (Ulips) are often promoted as a smart financial product be-cause they combine life insurance with investment. However, they are not always the best choice for most people. One major drawback of Ulips is the high cost involved. In the initial years, they come with several charges such as premium allocation charges, administration fees, fund management charges, and mortality charges. These deduc-tions can significantly reduce the value of your investment, especially in the early years.

Another disadvantage is the five-year lock-in period. If you realise later that the product doesn’t suit your financial goals or if you need urgent access to your money, you cannot withdraw it freely. This makes Ulips much less flexible than other investment options. Moreover, the returns from Ulips are market-linked, meaning they depend on the per-formance of the funds chosen. This carries a risk, and unlike fixed deposits or Public Provident Fund (PPF), there are no guaranteed returns.

"Investment options are limited to the fund offerings of the insurance provider, which can constrain performance. Furthermore, the structure of Ulips is often complex and lacks transparency, making them difficult for average investors to fully understand," said Gaurav Goel, an entrepreneur and Sebi-registered investment advisor.

Moreover, many investors are not fully aware of how the charges work or how the in-vestment is performing. Insurance agents may not always provide clear explanations, which can lead to disappointment later.

Harsh Gahlaut, co-founder & CEO, FinEdge, says, “One of the most damaging mistakes investors make is mixing insurance with investing. Ulips are a prime example. They blur two fundamentally different needs and often end up under-delivering on both. Between the high charges, opaque structures, and long lock-ins, Ulips rarely serve investors looking to build long-term wealth.”

A fundamental principle of sound investing is not to mix insurance with investments.

"Given these limitations, a better alternative for many investors may be to separately invest in equity instruments, such as mutual funds or direct stocks, with a long-term horizon, which aligns with the underlying philosophy of Ulips. The universe of mutual funds and stocks offers greater variety, better fund manager choices, and broader di-versification opportunities. These investment vehicles generally come with lower costs, greater transparency, and superior liquidity, potentially resulting in better risk-adjusted returns compared to Ulips. To incorporate the insurance element, investors can simply purchase a pure term life insurance policy, which provides substantial life cover at a much lower cost," said Goel.

Mutual funds are designed for one thing: efficient wealth creation. They offer profes-sional fund management, liquidity, transparency, and low costs. More importantly, they allow for customisation based on your goals, risk appetite, and investment horizon. Whether it’s saving for retirement, your child’s education, or building a safety net, mu-tual funds offer the flexibility to do it right.

“Unlike Ulips, mutual funds keep you in control. With tools like SIPs, STPs, and asset al-location strategies, you can stay disciplined without being locked into rigid contracts. They let you respond to life changes, rather than get stuck in a product that no longer serves your needs,” said Gahlaut

“Ulips are usually pushed by sales agendas due to high commissions. Mutual funds are chosen with planning and purpose. If you’re serious about building wealth, you need clarity, transparency, and a process-driven approach, things Ulips simply don’t offer,” added Gahlaut.

Although Ulips offer tax benefits under Sections 80C and 10(10D), these advantages are not unique. Mutual funds and term insurance can also help you save tax, often more simply and efficiently. In summary, Ulips are complicated products with high charges, limited liquidity, and uncertain returns. If you aim to grow your wealth or protect your family financially, it's usually better to invest in mutual funds and buy a separate term insurance plan. "Wealth creation demands discipline, not bundled products. Choose investments that serve your goals, not someone else’s sales target," said Gahlaut.