Khota Paisa

ULIP – A 3 Year Love Story

Posted in Investment by khotapaisa on December 30, 2009

The single biggest reason for the extraordinary success of ULIP plans is the 3 year lock-in period. This feature of ULIP is disastrous as far as financial logic is concerned. But it is a masterstroke in terms of financial behaviour of humans. When a risky investment product like ULIP is presented to investors, you would expect the ever cautious investor to generally keep away from it. But the flexibility to stop paying premium after 3 years is what attracts the common investor. The common man actually sees the ULIP as a 3-premium-with-continued-benefit policy. And this explains the common practice of paying premiums only for three years.
The first three years are the costliest in terms of various charges that the investor pays. To cover this loss, the investor must remain invested for the full term of the ULIP. Calculations show that it is only after 10 years or so that this loss of income (by the way of high front end charges) is covered. The figure of 10 years also alignes well with the concept that any equity investment must be held for atleast a full equity cycle(typically 10 years). Another fine print that people fail to see is related to the idea that the benefits of ULIP (insurance or protection) continues even if you stop paying after first three premiums. It is actually not the case. All the protections that the ULIP offers, go away when your corpus falls below a certain value. So if market performs really bad during a certain period, you may stand to loose the insurance benefit from the ULIP if your corpus falls too low.

If you are one who is planning to take ULIP plan then make sure that –

1. Your premium paying term is more than 10 years.

2. You pay all the premiums.

3. You invest in all-equity fund option within the ULIP plan until you are 3-5 years away from maturity.


7 Responses

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  1. Vishwas Gupta said, on January 3, 2010 at 10:02 pm

    I am a regular visitor of your blog and find them an interesting read. I like the simplicity with which you explain the various financial and non-financial aspects of different investment products.

    May I request you to throw some light on medical plans available in the market. These are generally complex and more often the person who took the medical cover end up in frustration when he needs the hospital.

    Keep up the good work!

    • khotapaisa said, on January 4, 2010 at 8:56 am

      Hi Vishwas,
      Thanx for your encouraging comments. I welcome your suggestion and would try to write a post on medical plans/health insurance next. Do keep providing your comments/suggestions.

  2. Pawan said, on January 4, 2010 at 2:33 pm

    Agreed with Vishwas…
    Your blog is simple, neat, good, informative and easy to understand the financial things!!!

    Though I have ICICI Lombard General Insurance (provided by company) for each family member but that benefits only in hospitalized. Is there any plan where we can get benefits on hospitalized, regular checkup, consulting or doctor fees, purchasing medicines and etc??

  3. rams said, on March 8, 2010 at 5:03 am


    I’m newbie to investment and need your advice.
    i bought sbi child plan (maturity 18 years). Premium payment is Rs. 50,000 anually for 3 years. Already paid for 2 years.

    I would like to know if i stand to lose risk insurance + protection if the corpus value falls below a certain value.

    How can i change the child plan so that i pay premium for more than 10 years?

    1. Your premium paying term is more than 10 years.


    • khotapaisa said, on March 8, 2010 at 5:41 pm

      Hi Rams,
      You do stand to loose protection if the corpus falls below a certain value. There is no way to change the existing policy. You pay the full term of 3 years and then buy another child ULIP for 15 years. I would suggest you consider PPF as well as part of child planning.

  4. Mayank Negi said, on April 27, 2010 at 2:17 pm

    I am confused about the locking period of ULIP.

    If I am paying regular monthly premium, the lockin period is calculated from the date of first premium or is calculated for each premium paid monthly.

    If it is calculated from the date of first premium, will I continue to get the tax benefit for all my monthly premiums, even after the lockin period is over.

    • khotapaisa said, on April 28, 2010 at 10:05 am

      The lockin period of ULIP is not like that of ELSS. It is for three policy years irrespective of the premium payment mode, yearly or monthly. You will get the tax benefit for each policy year for the sum equal to the premium for as long as you pay premium, not just for the first three years. The monthly mode is just a way to pay the premium.

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