ULIP vs Mutual Fund + Term Insurance: The Updated 2026 Comparison

By
Hemant Beniwal
-
58
ULIP vs Mutual Fund + Term Insurance – Which is better for me?

Last Updated on April 21, 2026 by Hemant Beniwal

“Do not mix investment and insurance. This principle has not changed in 25 years – and it will not change in the next 25.”

A client came to me with a ULIP he had been paying into for 9 years. He was paying Rs 1.2 lakh per year. His fund value was Rs 9.8 lakh.

Nine years. Rs 10.8 lakh invested. Rs 9.8 lakh current value. A negative return on 9 years of savings.

I showed him what Rs 1.2 lakh per year in a diversified equity mutual fund would have produced over the same 9 years. At a modest 12% CAGR: approximately Rs 18.5 lakh. Plus he would have had a Rs 50 lakh term cover – which he could have bought for Rs 12,000 per year instead of the embedded ULIP mortality charges.

The ULIP had consumed the difference in charges and mortality costs. He was not in a bad ULIP – it was a major insurer’s product. He was simply in the wrong product for his goals.

⚡ Quick Answer

ULIPs combine insurance and investment in one product. Mutual funds with a separate term plan keep these apart. For most investors, keeping insurance and investment separate is better: you get more life cover per rupee from a term plan, and more investment returns per rupee from a mutual fund. ULIPs have legitimate uses in specific tax and estate situations – but they are not the default right choice for wealth creation or retirement planning.

ULIP vs mutual fund plus term insurance - which is better for retirement planning in India

What Changed After 2020: IRDAI’s ULIP Reforms

When I first wrote this article in 2017, the ULIP vs mutual fund debate was more one-sided than it is today. SEBI and IRDAI have since intervened. IRDAI’s 2020 guidelines significantly reduced the charges cap on ULIPs: total charges capped at 2.25% per annum for policies with terms of 10+ years. Fund management charges alone cannot exceed 1.35%.

These reforms made ULIPs meaningfully more competitive on costs. The highest-charging ULIPs of 2010-2015 (which consumed 5-7% of premium in early years) no longer exist in the same form. Modern ULIPs from reputable insurers are a different product from the ones that earned the industry’s poor reputation.

That said, the fundamental principle remains intact: for pure investment + term insurance needs, mutual fund + term plan still outperforms on flexibility, liquidity, and cost transparency. ULIPs are no longer definitively worse – but they are still not the default right choice.

“My view was that the ULIP vs mutual fund debate was settled. It is mostly settled. But the question has evolved: it is no longer ‘is your ULIP robbing you?’ It is ‘does a ULIP serve your specific situation better than the alternative?’ That is a more nuanced question.”

– Hemant Beniwal, CFP, CTEP | Founder, RetireWise

The Core Comparison: ULIP vs MF + Term Plan

Life insurance coverage: A term plan provides the most life cover per rupee – a 35-year-old non-smoker can buy Rs 1 crore of cover for approximately Rs 10,000-15,000 per year. A ULIP with the same annual premium provides insurance as a fraction of the sum assured, with mortality charges increasing with age. For pure life protection, term plan wins decisively.

Investment returns: Equity mutual funds are dedicated investment vehicles with no embedded insurance costs and typically lower expense ratios than ULIP equity funds. A well-run diversified equity fund at 0.8-1.5% TER compares to ULIP equity funds at 1.35% FMC plus mortality charges. Over 15-20 years, this cost difference compounds meaningfully.

Flexibility: Mutual funds offer daily liquidity after any exit loads expire. ULIP has a 5-year lock-in (IRDAI mandated). Partial withdrawals from ULIP are allowed after 5 years, but with restrictions. Fund switching within ULIP is free (up to a certain number of switches per year) and has no capital gains implications – which is the ULIP’s most significant practical advantage over mutual funds for active asset allocation.

Tax treatment (post FY 2021-22): ULIPs where annual premium exceeds Rs 2.5 lakh are now treated as capital assets for taxation purposes – gains are taxed like equity mutual funds (12.5% LTCG above Rs 1.25 lakh, 20% STCG). For ULIPs where annual premium is below Rs 2.5 lakh, the traditional EEE (Exempt-Exempt-Exempt) tax benefit remains. This 2021 amendment reduced the tax advantage of high-premium ULIPs significantly.

Have a legacy ULIP you are not sure whether to continue or exit?

The surrender vs continue decision depends on your specific policy, charges, surrender value, and retirement plan. A RetireWise advisor can run the numbers for your situation.

Book a Free 30-Min Call

When ULIP Actually Makes Sense

There are specific situations where a ULIP is the right product:

Annual premium below Rs 2.5 lakh and long lock-in acceptable: For this premium range, the EEE tax benefit is intact. If you want a long-term investment with forced savings discipline, no desire for active management, and the premium is comfortably within Rs 2.5 lakh per year, a low-cost ULIP from a reputable insurer is a reasonable choice.

Estate planning and keyman insurance: ULIPs have specific advantages in estate planning contexts and for business keyman covers. The insurance component can be structured to pass proceeds to nominees efficiently. For complex estate situations, consult a tax and legal advisor alongside a financial planner.

Investors who cannot maintain the SIP discipline: The ULIP lock-in forces saving. Investors who have a history of stopping SIPs during market corrections or spending bonus money before it can be invested may benefit from the commitment mechanism of a ULIP – even at a slight cost efficiency disadvantage.

What to Do If You Have a Legacy ULIP

Many clients I work with are 45-55 and have ULIPs bought in 2008-2015 – some delivering poor returns, some performing reasonably. The question is always: should I continue or surrender?

The calculation: compare the current surrender value vs the projected maturity value, factoring in: remaining years to maturity, current fund performance, remaining charges, and what the same money would earn in an equivalent mutual fund. If the policy is within 3-4 years of maturity, continuing is usually better – most charges have already been paid and surrendering now crystallises the loss without benefit. If the policy is early-stage (years 1-5) and showing poor performance, surrendering and redirecting may make sense after accounting for surrender charges.

Never make this decision based on sentiment or the agent’s persuasion. Run the numbers.

Read – 5 Insurance Policies You May Not Need – And One You Must Never Drop

Read – Types of Mutual Funds: The Complete 2026 Guide

Frequently Asked Questions

I was sold a ULIP as a retirement plan. Is it suitable?

ULIP can be one component of a retirement plan if costs are low, the policy horizon is long, and premium is below Rs 2.5 lakh per year. But ULIPs should not be the primary retirement vehicle for most professionals – their returns are typically below equivalent mutual fund + term plan combinations over 15-20 year horizons due to embedded charges. If your retirement plan relies predominantly on a ULIP, get an independent second opinion on whether the projected corpus is adequate.

Can I switch funds within my ULIP?

Yes – most ULIPs allow fund switches (between equity, balanced, and debt options within the policy) a certain number of times per year for free. This is one of ULIP’s genuine advantages over mutual funds: you can shift from equity to debt as retirement approaches without triggering a capital gains tax event. In mutual funds, the same shift is a redemption and reinvestment – and may trigger LTCG.

What is the minimum lock-in period for ULIPs?

IRDAI mandates a 5-year lock-in for all ULIPs. You cannot surrender or make full withdrawals before 5 complete policy years. Partial withdrawals are allowed from the 6th year in most policies. If you need liquidity before 5 years, a ULIP is the wrong instrument – use open-ended mutual funds instead.

The ULIP vs mutual fund debate is no longer as black-and-white as it was a decade ago. Modern ULIPs with capped charges are better products than their predecessors. But the fundamental principle has not changed: if you need life insurance, buy a term plan. If you need investment returns, invest in mutual funds. Combining them rarely produces the best of both – it usually produces an acceptable compromise of each.

Separate your insurance needs from your investment needs. Clarity serves both better.

Want an insurance and investment review as part of your retirement plan?

RetireWise reviews your complete financial structure – term cover, health insurance, ULIPs, endowments, and investments – to ensure every rupee is working as hard as it can.

See Our Retirement Planning Service

💬 Your Turn

Do you have a ULIP in your portfolio – and are you clear on how it fits into your overall retirement plan? Share your experience in the comments.

58 COMMENTS

  1. As of today, when mutual funds (LTCG) are taxed 10% (above 1 lakh per year) do ULIPs now makes any sense or it is still not worth looking at?

  2. Hello sir, never invested in ULIP because i was not sure about investment in market as a whole. So have term plan. After going through some coveted blogs decided to start SIP in MF shortly.

  4. Thanks Mr Hemant,
    For open my eyes to understand about the difference between investment & insurance.
    I have mixed both together & wasting money.

  5. Hi Hemant,
    I bought my ULIP plan just for a tax saving as suggested by one of my friend. I realised my mistake when I actually started doing my financial planning.
    Now I have Mutual fund and Term plan separatly.
    I have already subscribed your article and hope for a better financial planning in coming future.
    Thanks for this nice article!!

  6. Hi Hemant,
    I bought my ULIP plan just for a tax saving as suggested by one of my friend. I realised my mistake when I actually started doing my financial planning.
    Now I have Mutual fund and Term plan separatly.
    I have already subscribed your article and hope for a better financial planning in coming future.
    Thanks for this nice article!!

  7. Hi Hemant.
    I am 55 yrs old and unemployed person,having lost my pvt. services as I undergone a major accident.I do not have liabilities,& have risk cover to dependent wife from LIC.If I withdraw total surrender values from lic (Jeevan saral where no vested bonus is available to a seven years premiums paid policy holder) I can get nine lacs right now,but will loose risk cover.(also 30% of invested amount will refunded less as per IRDA rules)
    Now I want to get pension till survival of me and my spouse.
    If I surrender the lic policies,I will get nine lacs. Also the interest rates of banks have declined. I am in trouble,and need atleast 10k /month to survive.Kindly suggest any suitable & low risk plan to get mly. pension .
    Which path is suitable to invest?
    1) Mutual fund SWP
    2) Mutual fund MIP
    3) Immediate annuity plan of LIC like Jeevan Akshay VI
    Kindly note, I don’t want return of purchase price to any nominee.I want 100% pension till survival of me and my wife.I aam free from other liabilities.Aalso I need immediate pension.

  8. Hi Hemant,
    Thanks a lot for enlightening our minds with the wisdom.
    Coming to the question if I have ever invested in ULIP Plan ? No never and I have never even suggested any of keens for this. Reason- In this world of uncertainties what counts most is liquidity. One should always prepare oneself for any financial urgency.I would rather invest in some open-ended MF with term plan and monitor the same from time to time.

    Cheers!
    Subrato Bhakat

  9. Hi Hemant,
    Thanks for providing an ocean of financial knowledge to all of us. Its really awesome.
    No, I have never invested in ULIP’s, neither I advise the clients to do so. The primary reason, I feel is levying of so many charges, including mortality, which leads to less money getting actually invested, thereby lower growth ratio. The other reason is the expert’s ideology (as you also highlighted) of keeping investments and insurance separate.

  10. I have never invested, i’m 32.Today a Bank Person advised me to Take HDFC progrowth, after which i searched n found it to be a ULIP. Needs financial assisstance to start investing in mutual funds

  11. I had purchased a ULIP- Life Stage Assurance Policy from ICICI Pru – paid 84 monthly installments of Rs 5000 and woke up to the reality , that I could have been better of with SIP’s for same amount. Even a debt fund SIP would have given me much better returns !!!. Costly way to learn a lesson!! I surrendered the policy and invested the Lumpsum in Birla Sunlife Balanced 95 Fund.Now I am relieved.

  13. Hi Hemanth,
    Right article at right time useful for one of my financial product!! Nice!!

    Recently last month I have taken HDFC Sampoorn Nivesh ULIP plan with Premoum of 1lack by mistakenly (somehow he tactically did not mention that it is ULIP. If I had heard that word, I may not have gone for that) and then after that I have realized that I am putting investment in wrong place then immediately I have called to that person and told him that I am not going ahead with this ULIP plan and will cancel the same in Free look period once I receive the original policy document.

    After that I have received original policy document 2 days back i.e. On 13th Nov 17 and then I have approached nearest HDFC life branch office and filled Free look cancellation form and submitted back to HDFC for cancellation of same.

    Now actual story started, I have started getting calls from that person and forcing me to continue in ULIP policy as it is going to give good returns compared to MF and some bla blaa blaa.. and also if I cancel this ULIP in free look period then it will be bad remark to that person in his career so he don’t want to cancel the policy and continue at least for one year, decide 2nd year based on the performance of fund whether to go ahead with 2nd/3rd/4th year or not.

    So, please suggest your opinion on above points for better understanding,

    1. Will I get my complete premium amount back or are there any charges they will deduct?
    2. If yes, what are those charges?
    3. What will happened if pay for 1st year and left it without paying further 4 years premiums?
    4. Is it really create that much impact to the sales person on cancellation of ULIPs as he is trying to convince like anything to continue?

    But I clearly told him that I will not continue at any cost in ULIP to make it clear.
    Please suggest.

    • Hi Nihal,
      They will deduct a very nominal amount for mortality charges – 15 days.
      The way you mentioned this product was mis-sold – you should use freelook period without thinking about salesperson.
      I will also add this comment to the post – so other readers can learn.

  14. Hi Hemant,
    Glad this topic surfaced once again…. sometimes ago, I did post my comments on this for which I expected some comments from you, unfortunately that didn’t happen.
    While DECLARING MFs to be superior to ULIP, how do we explain the expense structure. We all know MFs have FMC going upto 2.55% of FV which in case of ULIPs is capped at 1.35%. This makes certain ULIPs very attractive over MFs, like click 2 Invest.
    My experience with MF portfolio and ULIPs over last 7 years has convinced me, if used sensibaly, ULIPs can prove to be superior to MFs (conditions apply).
    Looking forward to expert comments from Hemant please…

    • Thanks for Your Views Vilas. Fund Management is not the only charge – you will still find premium allocation & policy administration charges. If we are comparing click 2 invest – it will be better if you look at the expense ratio of direct mutual funds. I have also mentioned in the post that scope of expenses reduction is there.

      • Leave alone all the charges. Even with the stated claim of low fund management charges, the returns on the NAV of the schemes of the ULIP (Actual return will further reduce for ULIP when other charges are accounted) are way below the returns on the NAV of good Equity Mutual Fund schemes even with the higher expense structure.
        I had given the comparison in one of my earlier comment and mailed to Hemantji for his expert comments.

  15. Yes I had purchase ULIP, HDFC Crest in 2010 with 50k premium, premiumpaid for 5 years. It will mature in 2020. I have invested 250k & present value is 503k. Risk cover is 5 lacs.
    I think it’s not bad. Since last 4 years I am investing in mutual funds & will continue to do so.
    Regards
    Indrajeet Singh

  17. Yes.. I have bought a ULIP Plan (Max Life Fast Track Super) for my wife on the advice of a banker. But somehow he tactically did not mention that it is ULIP. If I had heard that word, I may not have gone for that. Now is it advisable to stop paying the premium?

    Regards
    Sudhir

  18. Dear Hemant

    Very prudent advice. though I have already committed the mistake of investing in an sbilife child plan (equity optimizer) but however for a lower premium of 1300 pm started in 2009. Thanks.

  20. Hello,

    Thank you very much for valuable information you provide here.

    My father’s friend had got me into “Bajaj Allaianz Future Wealth Gain” Ulip plan, in July 2017.

    Premium is 3 lac per annum, for 5 years, term is 20 year, sum insured 30 lac.
    One of reason to go for such high premium amount said that there was no allocation charge for 3 lac premium.

    It’s been few months, I am skeptical about this investment. Wht should i do? Should surrender it after 5 years?

    • In case you decide to keep the ULIP, ensure all your fund value sits in pure equity plans (~90%) that are under this ULIP, for the last but 3 yrs of the run. As you get closer to maturity, move systematically (in parts) your funds to hybrid / balanced plan (<65% equity) to debt plan (<10% equity). Eventually at the end of your run, all your fund value should sit in debt. You should make good returns with this strategy. In the middle years, do not make the mistake of moving funds between equity to debt and vice versa. This will cost your dearly. Have a pleasant run.

  21. This Insurance Industry can still be saved if front loading is removed. It was the same case with Mutual Funds until front loading was removed.

  23. Dear Hemant,

    Firstly let me thank you for the wonderful knowledge base you’ve created for everyone. I’ve read many articles and found them to be very useful.
    Let me ask you the question I’ve had for quite some time now:
    I’m invested in a ULIP which matures in 2022. I had started it in Jan 2012. I was expected to pay annual premiums for first 5 yrs only which I have already done. In 2022, I’m expected to either take away entire fund value as lump sum or give Standing Instructions to be able to withdraw the fund value in installments over the next 5 yrs.
    As it stands today, my investment spread over equity funds (>90%) and debt funds (<10%) that are available as part of the ULIP, is currently earning rate of return (CI) of 11%. Absolute increase is 49%. I’ve been managing asset allocation on my own so far. I'm 40 yrs old. Note, I cannot change asset allocation once policy matures.

    1. At maturity, should I withdraw entire fund value or portions of it only? I don’t foresee a need in 2022 to withdraw a lump sum. If in parts, should I withdraw monthly, quarterly, annually etc?
    2. At maturity should I leave asset allocation as is so it may have a high chance to earn good returns? OR Should I start moving assets from equity portion to debt portion? If yes then to ensure that
    a. my entire fund value at time of withdrawal attracts zero or least tax and
    b. my investment is safe from market volatility
    , when should I start so as to complete the entire movement prior to maturity?

    Appreciate your responses and any other strategic advice. Please let me know if you have any questions before you are able to answer mine ?

    Thanks
    Anand

      • Hi Anand,
        I read this earlier but not sure how to reply. Sorry but I need your complete financial life details to suggest you anything. I will suggest you consult a good Financial Planner in your area.
        Sorry for disappointing you 🙁

  24. Did buy HDFC Young Star in 2004. But exited in 2013 after comparing the performance with respect to MF schemes during the same period.
    MF+Term Insurance is always better. I had prepared detailed comparison figures to prove my point and sent to many websites but no one published!!!!

      • I had the complete file but I am not able to trace it. Now I tried to make the same for the period 2007 to 2017. Please see.
        ULIPS
        Sl# Name 01.04.2007 01.04.2017 RETURN PT TO PT

        1 HDFC YOUNG STAR GROWTH 52.023 148.9546 186.3245103
        2 HDFC YOUNG STAR EQUITY MANAGED 43.624 130.0835 198.1925087
        3 ICICI LTS PENSION MAXIMISER SERVICE NOT AVL AT THE TIME OF CHECKING
        4 ICICI LTS PENSION FLEXI THE WEBSITE on 19.11.2017 @ 19:15 HOURS
        Actual return is lesser than the pt to pt return because of mortality charges,policy admn fee& service tax thereon
        MFS RETURN PT TO PT
        5 HDFC EQUITY GROWTH 136.747 550.489 302.5602024
        6 HDFC TOP 200 GROWTH 100.01 405.429 305.3884612
        7 ICICI PRU DYNAMIC GROWTH 60.3357 230.7557 282.4530087
        8 ICICI PRU DISCOVERY GROWTH 23.7 131.28 453.9240506
        9 ICICI PRU TOP 100 85.15 292.49 243.4997064
        This is the actual return for the investor. In Direct plans the return will be still higher

  25. Yes, I had invested in ULIP i.e. ICICI Pru Life. Started with Rs 20k annual premium in 2004, followed by two more installments of 20k each in 05 and 06. So total 60K investment in three years.
    Recently, i.e. in Sept 2017 I liquidated that Policy and got returns Rs 1.98 Lacs, with Life coverage for Rs 2.0Lacs thruout.
    My observation is, if one can remain long invested, the returns are quite OK.
    ULIPS could be meaningful, if age of Life ensured is not much (i.e. if you want to cover your Son/daughter/or self in early age of 21-30 years at beginning of Policy) to minimise insurance related loading, and then have a policy horizon of 15-20 years maturation (longterm) when it keeps multiplying.

  26. Not bought ULIP in real sense.
    But did buy UNIT LINKED SINGLE PREMIUM WITH TOP UP FACILITY PENSION PLAN also called as ULPP from HDFC STUD LIFE.
    As small part of Retirement Portfolio it has worked well.
    Will recommend to have 20% of Retirement folio in such plans.

      • there was no NPS then in 2004,so no comparison as on that date.
        i was wise to select single premium with top up because there is only 2% commison involved,it was bit difficult not to be impressed for many other ULIPS offered.My options balanced managed & defensively managed did perform well,returns point of view ,they did not lag behind much.overall expense ratio was just minimal.
        i have converted full amount to annuity with return of purchase price so on my death my heirs stand to get something.
        yes,now NPS & MUTUAL FUNDS WILL BE MORE WISE OPTION

  27. Yes I have made the grave mistake of investing in an ULIP, SBI LIFE SMART WEALTH BUILDER. I have paid only 1 instalment of 50k. I have decided not to pay any other instalment . I needed to pay 4 more instalments before I can get my money back since lock-in period is 5 yrs.

    I had opted for 80:20 ratio for debt: equity investment. Hope market does well and I can get my 50k back.

    Can anyone tell me if there is any way to get my money, whatever amount may be , before the lock-in period ??

    • Hi Sangram,
      I am afraid – you will not get benefits of the equity market. They are going to give you saving bank interest for this. Please have a word with SBI guys.

  28. Agree with the article in principle. However, for the calculations, would have been a better idea to consider 12% as the rate of return for mutual fund. Also focus more on the lower insurance cover in ULIP plan vs TERM plan and the higher commissions generally (if that is still the case) in case of ULIPs

  29. Hi
    I am a follower of your blog since I have started to earn money. Till date, I have invested in mutual funds, stocks and bonds but never ‘invested’ in ULIP or any other insurance product. As of now, I don’t have any dependant, so not purchased any term plan yet.

    In near future also, I don’t have any intention of buying any ULIP or Money back product.

    Thank you for your articles,

    Sayan Kundu

  30. Yes, one of my earlier financial mistakes. My father’s friend convinced my father and me to take a SBI Life Flexiprotect Fund policy in 2009, when the Sensex was around 9k.

    The premium was 50k per year x 3 years, and I’d get tax benefits !! It will mature in 2019 after 10 years.

    Having paid 150k, the current fund value is 218k (1.45 times my investment only), with the Sensex having risen 3.6 times in this period.

    Since only 2 years are left, I’ll complete the tenure and then surrender the policy.

    • Hi Koustubh,
      It’s still low but I think that’s not the right comparison because you have invested over a period of time.

  31. I did not invest in ULIP , because I knew already that it will neither give good return as MF nor we can be insured sufficiently as in TERM PLAN.
    A JAYAKUMAR

  33. Yes, I have invested in an ULIP – HDFC Young Star, which was started in 2008. At that point of time, I was taken in by the “flexibility factor”, where I felt that a number of options provided to me, gave me the freedom to re-balance my portfolio (the equity component), depending on the way the market was performing, at any point of time. I was also quite satisfied that the insurance part provided a certain stability to this investment, as it served the elusive goal of 2 in 1!!
    However, I am convinced now that a MF with a pure term plan, works better in the long run.

    • Hi Japesh,
      We all love 2 in 1 sounds like buy one get 2 🙂 Anyways, good that you have learned the lesson. It’s important to share this message with our friends.

    • Hi Piyush,
      But you also have read at few other places it’s good. It’s important to understand principle our decision are based on.

  35. Hi Hemant,
    Thanks for reminding me of my first financial mistake.
    I got my first salary in 2007 & dad introduced me to his lic agent. He advised for a money back plan but I asked him to suggest some good ulip. So I can’t even blame anyone.

Leave a Reply to Koustubh Chakraborty Cancel reply

Please enter your comment!
Please enter your name here