Risks Associated with ULIP Investment and How to Mitigate Them

Risks Associated with ULIP Investment and How to Mitigate Them 1

Unit-linked Insurance Plans (ULIPs) are a unique product that offers the dual advantages of life cover and investment returns. A certain portion of the premium gets deducted as ULIP charges. The majority gets invested in different fund options, such as debt, equity, or a mixture of both funds. Because a specific sum is invested in market-related products, there are some risks when you choose a ULIP. However, the risk linked with a particular ULIP depends on the fund where you invest your money. Here are some ways to control the risks associated with ULIP investments:

  1. Invest for a longer period

ULIPs have a minimum lock-in period of five years, during which you cannot discontinue the policy. It is recommended that you hold your investment for a duration exceeding this five-year lock-in to mitigate market-related risks and earn higher returns. Historically, it is seen that when you invest in equities for a longer-term, you can earn higher returns. Therefore, choosing a ULIP that invests a majority of the corpus in equities and some part in debt can provide balance to your ULIP investment and reduce the risk.

  1. Switch between funds to ride out market volatility

Insurance companies allow you to move your investments from one fund to another without any tax implications. It is a convenient way to protect your money during market volatility and maximize returns through balanced investment between equity and debt funds. Consider your risk appetite, financial objectives, and market conditions before switching from one asset class to another.


If you predict a fall in the stock market, you may want to switch to debt funds. Once the market is stable and starts recovering, you can consider transferring your money back to equity funds. You can also move most of your corpus to debt funds as the policy gets closer to the maturity date or if a long-term financial goal is approaching soon. This mitigates the risk due to unfavorable market movements and secures your corpus. Additionally, you earn maximum returns at the time of withdrawal.

  1. Automatic switching

If you are not financially savvy or do not know financial markets, you can choose the automatic asset allocation option provided by the insurance company. Experienced fund managers will invest your money in different asset classes based on your age, financial goals, and risk-taking capability. Some insurance companies provide an automatic investment facility. When you choose this option, the corpus is automatically switched from high-risk investments to low-risk products based on your age and the balance investment time. This is a good way to mitigate your risk of ULIP funds and maximize the returns.

  1. Diversified portfolio

You may have heard the saying, “do not put all your eggs in one basket.” Similarly, it would help if you chose multiple asset classes to invest your money in. You should diversify your ULIP investments in equity and debt funds. Doing this will let you balance the returns by offsetting any potential loss from one type of investment with the other asset classes’ earnings.

Several insurance companies offer different types of ULIPs. It is essential to compare the historical ULIP performance to make an informed decision. While researching, check asset allocation and charges like administrative, premium allocation, fund management, and mortality costs, as they affect your overall returns.

ULIPs are an excellent product to include in your investment portfolio due to their versatility, double benefits, and tax advantages. However, ULIP performance is market-related, and therefore, it is important to study the different options in detail to make the right choice.

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