For investors aiming to merge protection with long-term wealth accumulation, ULIPs serve as an effective tool, notably recognized for their dual tax advantages. Firstly, under Section 10(10D), both maturity and death benefits from ULIPs are tax-exempt. If the annual premium is ₹2.5 lakh or less, maturity proceeds are free from long-term capital gains (LTCG) tax, allowing investors to potentially amass a significant corpus over time through a Systematic Investment Plan (SIP), all of which remains tax-free at maturity. Additionally, the death benefit is fully tax-exempt, irrespective of the premium amount. Secondly, as outlined in Section 80C, investors can claim a deduction on ULIP premiums up to ₹1.5 lakh each financial year, effectively lowering their taxable income.
This well-known section applies only to the old tax regime, but ULIPs offer unique benefits upon maturity. Furthermore, the recent GST reform in September 2025 eliminated GST on life insurance products, positioning new-age ULIPs as efficient tax-saving instruments for long-term financial goals like retirement, child education, or home purchases, now available without any direct or indirect tax liabilities. Historically, ULIPs were perceived as less appealing compared to other market-linked investments like mutual funds due to their higher costs. However, recent regulatory changes by IRDAI, alongside the rise of online products, have made ULIPs more cost-effective and transparent. The IRDAI has limited overall charges and mandated that fees be distributed evenly over the first five years, thus avoiding steep upfront costs.
In response to competition from mutual funds, insurance companies have slashed their charges, particularly for online plans, with total charges capped at 2.25% annually for the first decade. Fund management fees are limited to 1.35% per year, which is comparable to many mutual fund expense ratios. The introduction of online ULIPs has also diminished agent commissions and allowed for significantly lower fund management charges. Many modern ULIPs feature either zero premium allocation fees or reduced administrative charges, ensuring more investor capital is allocated to market-linked funds, enhancing long-term compounding. These adjustments have renewed investor confidence, making ULIPs a viable alternative to mutual funds. Moreover, ULIPs provide a Waiver of Premium Benefit, a feature absent in mutual funds.
While mutual funds offer payouts based solely on market value, ULIPs guarantee a higher death benefit through a sum assured or the fund’s value, giving families financial security in adverse market conditions. Investors can choose Waiver of Premium options to ensure continued premium contributions, supporting family goals even in the policyholder’s absence, with various options like regular income for children’s education. ULIPs also facilitate tax-free switching among different fund options, such as equity and debt, within the policy. This flexibility, combined with the product’s design promoting long-term investing—where the minimum policy term is five years—encourages disciplined investment behavior. Serious investors, who understand the importance of staying invested rather than timing the market, find this structure beneficial.
For instance, an investor who puts ₹20,000 monthly into a direct mutual fund for ten years, assuming an 18.5% return and a 0.63% expense ratio, could expect a payout of ₹1,73,55,831 after twenty years, incurring ₹21,18,690 in LTCG tax. In contrast, an investor with the same monthly investment in a ULIP with an assumed return of 15.7% and a 1.73% expense ratio would receive ₹1,76,38,111, including a sum assured of ₹24,00,000, with no LTCG tax due to ULIPs’ tax-free maturity. Pavit Laul, Head of Investments at Policybazaar.com, asserts that online ULIPs are now a superior investment choice, offering the dual benefits of insurance and wealth creation.
They provide tax benefits under Section 80C and tax-free maturity proceeds for annual premiums up to ₹2.5 lakh, all at competitive costs due to their online distribution model. The removal of GST on insurance products further enhances ULIPs’ cost-effectiveness. The addition of the Waiver of Premium benefit and the option for tax-free fund switching adds to their attractiveness, making them a comprehensive solution for long-term financial planning, helping families achieve their goals while safeguarding against life’s uncertainties.