If you’ve ever been pitched a Unit Linked Insurance Plan (ULIP) and felt a mix of excitement (“Yes, I’m investing”) and confusion (“Huh, what exactly am I buying?”), you’re not alone. A lot of first-time salaried professionals, especially in Tier-2 and Tier-3 cities, are faced with this: an insurance product + an investment component wrapped together. Sounds smart, na? But here’s the honest truth if you don’t watch out, you might be walking into ULIP mistakes that can cost you time, money and peace of mind.
In this blog, we’ll break down top ULIP mistakes people commit in 2025 with real examples, actionable advice, and simple language. No jargon, no shame. Just clarity. And yes doing so could save you ₹lakhs over time. Let’s go, chalo.
Why ULIPs look attractive (and why they often disappoint)
Before we dive into mistakes, let’s set the stage: what exactly is a ULIP, and why many young professionals pick one.
A ULIP is an insurance + investment product: part of your premium goes towards life cover, and the rest is invested in market-linked funds (equity/debt/hybrid). Sounds like a “two-in-one” deal, right? But therein lies the catch.
Key features you must keep in mind:
- Long lock-in period (typically 5 years)
- Market-linked returns (so higher risk, less guarantee)
- Higher charges/loads in early years
- Tax benefits under Section 80C & Section 10(10D) (with conditions)
Why young folks choose them:
- Want life cover + investment in one product
- Attractive “tax saving” tag
- Agent’s pitch: “You’ll build wealth + protect family”
However stories from the ground say the returns often lag behind expectations. For instance, one Redditor shared:
“I have paid 5 L as premium over 5 years, my fund value is ~6.13 L. Meanwhile a direct Nifty-50 index fund would have given me much more.”
Also, according to a recent article in Mint, many investors end up confusing investment and insurance, and ignore the hidden charges.
So yes ULIPs have potential, but only if used the right way, and with full awareness. Let’s see the common traps.
12 Common ULIP Mistakes to Avoid (2025 edition)
Here are the most frequent mistakes young salaried Indians make when buying or holding ULIPs. I’ll also include examples and what you can do instead.
1. Mixing up insurance and investment
Many people buy a ULIP thinking: “I’ll get both cover and huge returns.” But in reality:
- The life cover portion is often modest compared to a pure term life policy.
- The investment component comes with market risk and costs.
As Mint reports: “Confusing insurance with investment is a common mistake when deciding between ULIPs and term insurance.”
What to do instead: Buy a term insurance policy to secure the life cover first. Then, separately invest (via a mutual fund or SIP) for wealth creation. Combining the two only because of an agent’s pitch might not serve your long-term goals.
2. Ignoring the cost structure – premium allocation, fund management, mortality charges
ULIPs tend to have hidden loads and fees, especially in early years. A report by Fortune India says high costs are one of the “most damaging mistakes” in ULIPs.
For example: If you pay ₹1 lakh premium and ~12% is lost to upfront charges, you’re only investing ~₹88,000. Over 5–10 years, that drag really adds up.
What to do instead: Ask for the break-up of every charge: premium allocation cost, fund management fees, policy admin charges. Compare net expected returns after costs, not just the headline return.
3. Picking the wrong fund type or risk profile
Your ULIP gives access to equity/debt/hybrid funds. But many select “equity fund” just because they heard “stocks give more returns”. If you’re young but risk-averse, or you don’t have 10+ years horizon, this mis-match is a mistake.
What to do instead: Be clear about your financial goal (retirement, child’s education, etc.), time horizon and risk appetite. Then pick a fund inside the ULIP that aligns. If unsure, start with a balanced or debt-oriented fund.
4. Treating the 5-year lock-in as exit point
In India, ULIPs typically have a mandatory 5-year lock-in. Many assume: “Cool, I’ll redeem after 5 years and walk away.” That’s a trap. While you can withdraw after 5 years, ULIPs are designed for long-term goals. The earlier you exit, the higher the impact of charges and the lower your investment time horizon.
What to do instead: Treat a ULIP as a 10–15 year+ product (even longer for retirement savings). If your goal is short-term (<5 years), this product is likely a wrong fit.
5. Not aligning the ULIP with your financial goal
One of the mistakes people make: buying a ULIP because “my friend did”, or because agent said “it’s good for tax saving”. But they don’t ask: “What am I saving for retirement, child’s education, or just tax?”
What to do instead: Write down your specific goal (e.g., “I want ₹50 lakh by age 45 for retirement”), decide how many years you have and match a product accordingly. If your goal is <7 years, a ULIP may not be appropriate.
6. Over-paying premium just to bag tax deductions
Many young salaried Indians pick a ULIP primarily for the 80C deduction and because “it’s five years plus tax-free”. But the newer tax rules make this even more complex (see next mistake).
You might pay a big premium so that you maximise deduction but end up locking money for long without proper returns.
What to do instead: Use the tax benefit as a secondary reason, not the primary one. First look at how the product aligns with your goal and risk. If you are paying high premium just for 80C, consider alternatives like ELSS, term insurance, etc.
7. Ignoring recent tax & regulatory changes
If you’re investing in 2025, you must know: the tax rules for ULIPs have shifted. According to the “Budget 2025” update: ULIPs with annual premiums above ₹2.5 lakh will be treated as capital assets and subject to capital gains tax.
That means the previously promoted “tax-free returns” may not apply if your premium crosses the threshold or your policy is surrendered early.
What to do instead: Check whether your ULIP is fully eligible for Section 10(10D) tax exemption. If not, compare expected returns after tax. Ask your advisor: “Will I lose tax benefit if I exit early or premium > ₹2.5 lakh?”
8. Not rebalancing or switching funds when needed
A ULIP gives you the flexibility to switch between equity, debt or hybrid funds (usually 3-4 free switches per year). But many ignore this. They set it and forget it. Meanwhile, markets change, and your risk profile might too (e.g., you got married, or your child is born).
Others miss rebalancing their asset mix drifts and the product no longer matches their goal.
What to do instead: Every 12 months, review your ULIP fund choice. If your goal moved ahead or you’re getting closer to retirement, move some allocation from equity to debt within the ULIP. Use the “switch” facility if available. Add a calendar reminder.
9. Early surrender or non-payment of premium
Sometimes due to financial stress or misunderstanding, people stop paying the premium or surrender the policy early. This is costly. Many ULIPs have surrender charges or heavy loads in first 5–7 years. You may lose a large chunk of your money.
For example, one blog says the “death by charges” story is common: only a small portion of the premium actually gets invested after all deductions.
What to do instead: Before buying, ask: “What is the break-even year?” and “What happens if I miss a payment or want to stop after 6 years?” If your cash flows are uncertain, a more flexible investment option may be better.
10. Being mis-sold (not understanding what you bought)
This is the classic middle-class Indian trap: Agent promises great returns + life cover + tax benefit you sign up without reading the fine print. You may not even know how much is going into life cover vs how much investment is happening.
Experts say many ULIPs underperform because investors were never clear about the structure, costs and risks.
What to do instead: Before signing the proposal:
- Ask for the fund fact sheet and projected returns (post-charges).
- Ask for how much life cover you’re getting.
- Ask: “If market falls by 30% next year, what happens to my ULIP?”
- Ensure agent gives you a written illustration of fund value at different years.
11. Relying solely on ULIP for retirement or child’s education
ULIPs can be one part of your plan, but if you place all your investment hope on a single plan, that’s a mistake. Your goals may change (kids, job switch, relocation) and product rigidity (lock-in, fewer fund choices) can hurt.
What to do instead: Use a diversified approach: something like term insurance + SIP in equity mutual funds + emergency fund + maybe a ULIP if it fits the goal.
You’ll find articles on diversification and goal-based planning on Paisaseekho’s Smart Investment Basics.
12. Ignoring the exit strategy or surrender value
When you buy a ULIP, you should know when you’ll exit, what value you’ll receive, how charges reduce over time, and whether switching or top-ups are allowed. Many skip this.
For example, you may see fund value after 10 years, but if you leave after 5 years the value might be close to zero due to surrender charges and early load.
What to do instead: At policy inception, ask: “What will I get if I surrender in year 6? Year 8? Year 15?” Get a surrender value illustration. Include that in your decision.
Putting it together: A smart checklist before buying a ULIP
Here’s a compact table (because I know you like quick reference) to compare mistakes and what you should ask/ensure.
| ✅ What you should do | ❌ What you may be doing (mistake) |
| Clarify your goal (child education, retirement) | Buying ULIP because “tax saving” only |
| Buy term insurance separately for life cover | Relying on ULIP alone for huge cover |
| Request full cost breakdown & net investible portion | Ignoring loads/charges and hoping for high returns |
| See fund options + pick based on your risk profile | Picking “equity option” just because it sounds cool |
| Check lock-in, surrender value, exit strategy | Assuming you can pull out after 5 years without cost |
| Review switching flexibility + annual check-in | “Buy and forget” without monitoring |
| Consider alternative investment routes (SIP, ELSS) | Choosing ULIP because agent told you so |
| Check new tax rules (premium > ₹2.5 lakh, capital gains treatment) | Assuming “tax-free return” always applies |
| Have diversified portfolio (insurance + investments) | Putting all bets on one product |
| Get a written illustration + ask questions | Going ahead because “everyone else is doing it” |
How to decide if a ULIP is really for you
You’re a young salaried person, possibly first in your family to enter formal savings and investment. You’re balancing aspirations, family responsibilities, maybe parental support. So here are four questions you must ask yourself:
- What am I saving for?
If your goal is short-term (say 3–7 years), a ULIP generally won’t be optimal. If your goal is 15–20 years (retirement at 55, child’s marriage at 30), then ULIP could be considered. - What cover do I need?
Term insurance is much cheaper for same life cover. If most of your premium is going into cover rather than investment, then the investment value suffers. - How flexible is my cash flow?
If you have unpredictable income (e.g., startup salary, gig side-income), you might find premium payments difficult. Missed payments hurt ULIPs a lot. - Am I comfortable with market risk + charges?
Unlike a fixed deposit, ULIP returns are uncertain, and early years returns are dragged by charges.
Ask yourself: “If my fund value dips by 25% in year 3, am I okay with it?”
If you answer “No” to any of the above, you might be better off skipping ULIP or buying with smaller premium, and using other simpler instruments (SIPs, mutual funds, etc.). You may also want to check our Paisaseekho guide on goal-based investing basics for more.
Real-life example: How a ULIP mistake cost a young investor
Let’s look at a simplified story (names changed).
Raj (age 28, Gurgaon) bought a ULIP in 2020. Premium ₹1 lakh per year for 10 years. He assumed great returns, life cover, tax benefit. He didn’t closely check the charges.
By 2025 (5 years later):
- He has paid ₹5 lakh premium
- Due to high loads in early years, only ~₹4.4 lakh got invested after charges
- Fund value is ~₹5.2 lakh (net return ~2.75% p.a.)
- Had he split the same money into term insurance (₹12,000 annually) + SIP in an index fund (~12% p.a.), his investment part could have grown to ~₹7.1 lakh in 5 years, plus he’d have better cover.
Here the mistakes: mixing insurance & investment, ignoring charges, not aligning with goal, exit potential ignored.
The takeaway: a ULIP could work, but only if you understand what you’re buying, hold it long, and keep costs low.
What to do now (Action Steps for 2025)
Relax, you’re still early in your career, and being aware of these ULIP mistakes gives you a huge edge. Here’s what you should do this month:
- Pull out any ULIP policy you hold already. Read its policy document. Find: premium amount, fund options, charges, lock-in date, surrender value.
- If you’re planning to buy a ULIP in 2025, treat this as step-one: clarify your financial goal and check alternative paths (term + SIP, ELSS).
- Use a comparison tool (many insurers provide them) to measure a ULIP vs term insurance + mutual fund route.
- Keep a long-horizon mindset. If your goal is >10 years, and you choose ULIP, treat it like a marathon, not sprint. Don’t stop payments, don’t exit early.
- Check that your premium is within tax-safe limits (under ₹2.5 lakh) so you maximise benefits and avoid surprises under the new taxation norms.
- Read the fine print. Ask at least three critical questions:
- What happens if I stop paying premium in year 7?
- Can I switch funds without cost?
- What will be my exit value at year 10/15 if market is flat?
- What happens if I stop paying premium in year 7?
By following these steps, you’ll avoid the typical ULIP mistakes, keep control of your money, and build wealth with confidence.
Conclusion
Look being young, salaried, and from a middle-class background doesn’t mean you have to accept mediocre returns or get trapped in mis-sold products. Yes, ULIPs have their place. But only when used with understanding and discipline. Forget the fear of “missing out” just because your uncle bought one. Instead, focus on your goals, your timeframe, and your comfort with risk.
If you spot yourself making any of these ULIP mistakes fix them now. Because the earlier you align your investment journey, the more your money works for you, not for the one who sold the policy.
Here at Paisaseekho, we believe smart money doesn’t mean smarter chasing it means clearer choices. Your future self will thank you.
FAQ Section
Q1. What are the major ULIP mistakes that first-time investors make?
Answer: The most frequent mistakes include: treating a ULIP as pure investment rather than understanding the insurance + investment split; ignoring high upfront charges; picking inappropriate risk/fund type; treating the 5-year lock-in as an exit point rather than part of a longer horizon; not aligning the product with a concrete financial goal; over-paying premium just for tax deduction; ignoring regulatory/tax changes (for example premium > ₹2.5 lakh); failing to utilise fund-switching or re-balancing; early surrender or non-payment of premium; relying solely on ULIP for major goals; and not knowing your exit or surrender value. We’ve explained each mistake in this article in detail.
Q2. How do the new taxation rules in 2025 affect ULIPs?
Answer: From the Budget 2025 announcements, ULIPs with annual premium exceeding ₹2.5 lakh will be treated as capital assets and subject to capital gains tax on redemption. That means if you have a large premium ULIP, the returns may no longer be fully tax-free under Section 10(10D). You will need to factor this into your decision, compare after-tax returns and check if the product is still worth it compared to alternatives like mutual funds + term insurance.
Q3. Is a ULIP better than a mutual fund or term insurance separately?
Answer: It depends on your goal, horizon and cost-sensitivity. A pure term insurance plan gives much higher life cover for lower premium compared to ULIP. A mutual fund (via SIP) often gives higher net returns because charges are low and you can exit anytime. Many experts say separating insurance and investment is clearer and more efficient. For example, Fortune India pointed out that ULIPs can under-deliver because they mix the two poorly. However, if you clearly need both cover + investment, have a long horizon (10+ years), and you pick the ULIP with low cost + good fund options, then a ULIP may work. The key: compare thoroughly, don’t rely on slogans.
Q4. What should a young salaried person check before buying a ULIP?
Answer: Here’s a checklist:
- Your financial goal (what you are saving for and how many years).
- Premium amount and whether you can commit for 10+ years.
- Life cover offered (compare with stand-alone term plan).
- Charge structure: premium allocation cost, fund management fees, mortality/admin charges.
- Fund options available and your risk appetite.
- Lock-in period and surrender value at different years (5, 10, 15).
- Fund-switching facility and whether you will review the portfolio.
- Taxation implications (especially if premium > ₹2.5 lakh).
- Alternatives: term insurance + SIP in mutual funds or ELSS vs ULIP.
- The exit strategy: what happens if your goal changes or you need liquidity.
Using this checklist reduces the chance of making ULIP mistakes and helps you pick a product aligned to your life.
Q5. If I already have a ULIP, what should I do now?
Answer: Good question you’re ahead because you’re reviewing. Here’s what you can do:
- Take your policy document and identify how many years you’ve paid, how many years remain, what fund you’re in, and what the current fund value is.
- Check if you’re comfortable paying the remaining premiums and whether the goal you set originally still stands.
- If the fund hasn’t delivered expected returns and you’re within the lock-in, talk to your advisor about switching funds inside the ULIP. Many ULIPs allow free switches.
- If you’re thinking of surrendering early (within 5–7 years), check surrender charges; sometimes it makes more sense to continue.
- Compare: if you stop this ULIP now and switch to term + SIP, what’s the expected difference in value at goal year? Do the math (we have retirement calculators on Paisaseekho).
- If you conclude the ULIP no longer suits you (goal changed, risk changed, cost too high), plan an exit when the lock-in ends and redeploy smartly.
- Most importantly: set a yearly review date for your policy, just like you review your salary and performance.
