It is similar to Mutual Funds where the premiums collected from the policyholders are used to create a Unit fund and units allotted to the investors. The NAV (Net Asset Value) of the allotted units keeps changing on a daily based on the performance of the funds. Out of the premium paid by the policyholder, after a small portion is set aside towards fund management and allocation charges, agent commission and policy administration, the money goes towards investment in bonds, stocks, mutual funds, and Life Insurance. The policyholders have the option to decide whether they would like to have their investment at low risk or high-risk funds. A high-risk fund is a fund where there is high exposure in equities while low-risk funds invest in more of debt funds.

While ULIPs have the advantage of giving a combination of Investment and Life Insurance, better returns, being tax-free, and is flexible, on the other hand, we always hear, “mutual fund investments are subject to market risk”. The value of ULIPS depends on market conditions which will reflect on their returns. They have a 5-year lock-in period and have a higher cost.