Do not buy ULIPs because equity mutual fund LTCG will be taxed!

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The day after Budget 2018 proposed LTCG tax on equity and equity oriented mutual funds, life insurers saw an opportunity to push ULIPS as the “go to” instrument now. Abandoning mutual funds in favour of ULIPS only to avoid the LTCG tax is like undergoing chemotherapy to shave a head (Robin Williams*). In this post, I present a single most important argument to never touch a ULIP.

* Robin Williams was referring to Micheal Jacksons habit of taking power painkillers just to go to sleep!

This is an ad by ICIC Pru Life Insurance.

ULIPs tax free equity vs mutua funds taxable capital gain

What is a ULIP? A ULIP is a combination of a life insurance cover and a mutual fund managed by the life insurance. Each year the cost of the life insurance cover will be deducted by removing ULIP fund units from your account. Hence unit-linked policy. As you age, the cost of life insurance increases (unlike term insurance). At the same time, as the value of your ULIP fund increases, the cost also decreases. Once the fund value exceeds the sum insured, the unit reduction will stop, but this takes several years. Read more: How ULIP Charges Reduce Returns!

In addition, there is a fund management charge taken from the fund value. Currently, this charge is well below that of regular mutual funds and a touch below or equal to direct mutual funds. There may be other charges like premium allocation and policy administration as a percentage of annual premium

Something that takes this long to explain should be avoided!!

ULIPS vs Mutual funds

Discussions on ULIPS vs mutual funds are often only about costs. I too have been guilty of this in the past.  This is flawed because investors are missing the most crucial difference between ULIPs and mutual funds.

Let assume that both mutual funds and ULIPs have the same expenses (this is not true as mfs are less expensive when combined with a term plan, but please play along).

Then, ULIPs gains are tax-free and mutual fund LTCG is taxable. If we look no further then ULIPs seem “good”? Hang on.

Some questions for mutual fund investors?

Have you ever worried about the star rating of your fund? Changed funds when it lost stars? Changed funds when returns were poor?

Do you see ULIP investors talk about star ratings (it is available at Morningstar). Do you see them exit a ULIP after few years and buy a new one? Relatively speaking, the answer is a practical no.

The ULIP is meant to be a marriage in which you grow old in (literally as costs depend on that). And like marriages, it is purely a matter of luck if your ULIP does well. If it does not (many ULIP buyers don’t look!) then you are trapped. Sure, sure you can exit and buy a new ULIP at an older age, higher premium and higher (repeated) cost. Brilliant!

Ulips bring forth the true meaning of “never combine insurance with investing”.

I hate the NPS for the same reason too. You do not get married to your fund managers! If they are not performing, chuck them and find another one. while you do this, you do not jeopardize your life cover. That is taken care of by a term plan with constant premium which seems smaller and smaller due to inflation and a higher salary.

This is why mutual funds + term insurance is so much more superior to ULIPs. Forget the costs! The flexibility to move in and out as we please is essential for risk management in equity.

The fund manager risk is ULIPs is the real risk! In mutual funds, I can change fund managers at any point or shift to index fund at will.

Sure, now there is a 10% tax when I do the switch. So what? Will you take a chance of being stuck in a bad investment just to save some tax? If so, good luck with your ULIP purchase.

If you value a tighter control on your portfolio and flexibility, then this tax is of no consequence to your plans!

Time to think like a rich person and not worry about peanuts! That is the way to become rich. May we all lose and gain lakhs in the equity market each day so that unnecessary gymnastics like worrying if ULIPS are better or thinking about booking one Lakh LTCG each year to save 10,000 a year (a year!!) does not seem such a big deal to us!

Stay away from ULIPs, not because they are expensive, but because you could get stuck within a terrible marriage.

What if I invest in multiple ULIPS? Sure, a scattergun approach will get your somewhere, but who knows how far that would be from your target?

Investing is only for spending money latter, for a future goal. To achieve this, tighter control of the portfolio with risk management is essential. Ulips allow this, but only within the same establishment! It is like saying you can buy mutual funds but only from X or Y AMC. That is what a ULIP is! Oh, I forgot being unit-linked, it will remove units from your fund value (like trail commissions) to pay for your life insurance.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Hi,
    I have a Ulip which is now 10 year old and fund value is more than SA already. I can switch to a conservative fund within my ulip. If I increase my monthly installment now from say 5000 to 7500, to get more benefit and also not taxed. This is not my only investment but one of investment. What do you feel?

  2. Dear Sir,

    Great article. Would appreciate if you write one on how to decide when to sell an ULIP after it has crossed a certain number of years, say more than 5 years.


  3. Great article. I like that it reflects on non-monetary costs more. My banker has been pressing me to invest in ULIPs touting their performance and tax relief. How do I find the XIRR of a ULIP vs a debt fund?

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