31 years old. Good salary. The bank relationship manager shows him a ULIP plan. Life cover plus returns plus tax saving. He signs up for ₹1.5 lakh a year.
Year three, he needs the money. Wants to exit.
Surrender charges. Underperforming fund. He is stuck.
He did not buy a bad product. He bought without reading the fine print. These are the mistakes that cost people the most when adding a ULIP plan to their investment plan.
Buying It Because the Bank Offered It
This is how most ULIP plans get sold in India.
You go to renew an FD or open a savings account. The relationship manager mentions a product. It sounds reasonable. You trust the bank. You sign.
The problem is that bank-sold ULIPs are not always the most competitive products. Premiums can be higher. Fund options can be limited. Charges can be steeper than what direct or online ULIP plans offer.
Before adding any ULIP plan to your investment plan, compare it yourself. Look at the fund options, the charge structure, and the lock-in terms. Do not let the convenience of the bank counter do the comparing for you.
Not Understanding the Charge Structure
Charges are where a ULIP plan loses people quietly.
Premium allocation charge before investing. The administration charges every month. Fund management charges every year. Mortality charge that climbs with age. Surrender charge if you leave early.
On ₹1.5 lakh premium, you are not investing ₹1.5 lakh from day one. And over a long investment plan, a 1 to 2% annual drag on returns is not a small thing.
Read the benefit illustration before signing. The numbers are all there.
Treating It as a Short-Term Investment
The lock-in period for a ULIP plan is five years. That is the regulatory minimum.
But five years is not the ideal holding period. It is the minimum.
A ULIP plan becomes genuinely competitive as part of a long-term investment plan only after 10 to 15 years. This is because the high initial charges in the early years get averaged out over a longer period. The fund also has more time to compound.
Someone who buys a ULIP planning to exit at year five is almost always disappointed. The fund value at that point rarely reflects the full potential of the product.
If you cannot commit to at least 10 years, a ULIP plan is probably not the right fit for your investment plan right now.
Ignoring the Fund Options
A ULIP plan is not one investment. It is a wrapper that contains multiple fund options.
Equity funds. Debt funds. Balanced funds. Some plans offer eight to ten different options.
Most people pick one fund at the time of purchase and never look at it again. Five years pass. The fund has underperformed. They did not switch when they should have.
ULIPs allow free fund switching a certain number of times per year. This is one of the genuine advantages of a ULIP plan over a traditional endowment plan. But it only works if you actually use it.
Review your fund allocation at least once a year. As you get closer to your goal or retirement, shifting from equity-heavy to debt-heavy funds reduces risk. Most policyholders never do this.
Buying Too Much Cover, Too Little Investment
A ULIP plan splits your premium between life cover and investment. The ratio depends on the sum assured you pick.
Too high a sum assured, and most of your premium goes towards mortality charges. Less reaches the fund.
Too low and your family is underinsured.
Already have a term plan? Choose a lower sum assured in the ULIP and push more towards the investment side. No other cover? The ULIP has to do both jobs. Structure it accordingly.
Surrendering During a Market Dip
This one is behavioural more than financial.
Markets fall. The ULIP fund value drops. Panic sets in. The policyholder surrenders.
The problem with this is twofold. One, surrendering during a dip locks in the loss. Two, if done before the five-year lock-in ends, surrender charges apply on top of the already-lower fund value.
A ULIP plan is a market-linked product. Short-term volatility is built in. The investment plan only works if you stay invested through the rough patches.
The people who surrendered ULIP plans in 2020 during the COVID crash and locked in losses missed the sharp recovery that followed in 2021.
Not Checking the Claim Settlement Ratio
People spend a lot of time comparing ULIP fund returns. Very few check the insurer’s claim settlement ratio.
The life cover in a ULIP plan is real insurance. If something happens to you, your family files a claim. The claim settlement ratio tells you how reliably the insurer pays out.
An insurer with a 98% ratio settles 98 out of 100 claims. One at 91% does not settle 9 out of 100.
This check takes five minutes. IRDAI publishes the data every year. Do it before finalising which ULIP plan to add to your investment plan.
A Quick Reference
| Mistake | What to Do Instead |
| Buying without comparing | Compare online before buying |
| Ignoring charges | Read the benefit illustration carefully |
| Planning to exit in 5 years | Commit to at least 10 years |
| Never switching funds | Review allocation annually |
| Wrong sum assured | Balance cover with investment goals |
| Panic surrender | Stay invested through market dips |
| Not checking the claim ratio | Check IRDAI data before buying |
Last Word
My colleague eventually recovered his investment. Stayed invested, switched to a better-performing fund, and by year seven, the corpus had grown meaningfully.
He says if someone had told him these things in 2019, he would have made the same decision to buy, just with fewer surprises along the way.
A ULIP plan is not a bad product. It is a product that punishes the uninformed and rewards the patient.
Build it into a long-term investment plan. Review it every year.
