Ever heard of an investment that promises the benefits of mutual funds and the protection of insurance? All wrapped into one “smart product” that offers the best of both worlds? That’s where people first hear about Unit Linked Insurance Plans (ULIPs). Many investors nod along when they hear about its offerings, but when a product sounds all too good, it’s usually worth pausing to understand what’s really inside.
Now, things get interesting here. This “smart product” has also become the vehicle behind mis-selling. We found a growing number of people who believe they have put their money into a mutual fund scheme, only to later discover that the product is nothing but an ULIP. Because they are both market-linked products and share some common terms, it creates confusion, which is often exploited to mis-sell ULIPs as mutual funds. Let’s break it all down: ULIPs, how they are mis-sold as mutual funds, and how to identify them.
Unit Linked Insurance Plans (ULIPs): What are they exactly?
ULIPs were introduced as a hybrid financial product combining insurance and investment, targeting middle-class customers. A few reasons ULIPs became popular in India:
- Promise of market-linked growth (up to 14% returns)
- Insurance benefits
- Lock-in period, seen as disciplined saving habit
- Tax-free benefits
While the benefits preach ULIPs as the “best of both worlds”, many investors are completely unaware of its product structure. Let’s understand it now with an example.
Mis-selling of ULIPs in India: A case study
For our case study, let’s assume the investor’s name as Aniket.
Mis-selling context:
Aniket, a 27-year-old marketing professional, asked for a lump-sum mutual fund investment. Instead, he was enrolled into a Unit Linked Insurance Plan (ULIP) that legally obligates him to pay annual premiums of ₹25,000 for the next five years, opposite of his one-time investment. The distinction between a lump sum mutual fund investment and a recurring ULIP premium was not clearly explained to him. The salesperson told him that he will have to pay his lumpsum amount only once, not revealing the fact that if Aniket defaults on the 2nd year premium, his investment will be forfeited by the company.
As a result, Aniket had no idea about the product’s structure and working. He was also unaware that only a fraction of his premium would go into actual investments, while the rest would be consumed by various fees and administrative charges.
How a ULIP works:
A ULIP splits each premium into three categories:
1. Insurance cover: A portion of the premium pays for life insurance. For Aniket, who was looking for growth rather than protection, this component was unnecessary.
2. Investment funds: The remaining portion is invested in mutual funds of your choice (equity, debt, or hybrid funds). The investment is represented as units and its value, known as net asset value (NAV), fluctuates according to market performance.
3. Charges and costs in ULIPs:
- Premium allocation charge: It is deducted upfront before investment. These fees are highest in the first year and gradually decrease over time. Aniket had assumed that his full ₹25,000 would be invested, but he immediately lost some amount to this fee.
- Policy administration charge: The fees are charged monthly or annually. If it is charged monthly, it means that a certain amount will be deducted from his yearly ₹25,000 every month.
- Mortality charge: This is a monthly cost for insurance coverage. If Aniket had invested in a mutual fund, he wouldn’t have incurred this cost.
- Fund management charge: This is an annual fee for managing the fund investments and is deducted from the fund value.
- Partial withdrawal and surrender charges: It is applicable if you withdraw or surrender money before the plan matures.
Although ULIPs may appear straightforward, they are often layered with the fees and deductions mentioned above, which Aniket only discovered much later. All these layered fees and charges were never clarified during the sale. Also, the intermediary’s first-year commission on a ULIP is materially higher than on a mutual fund.
Why was ULIP unsuitable for him?
- He asked for a one-time payment, instead got a 5-year recurring premium payment.
- He wanted growth, not an insurance cover. ULIP was forced upon him.
- He was misled into thinking it was a mutual fund scheme.
This lack of product clarity led Aniket investing in a product that was not suitable for him, and the root of the problem? The fundamental mix-up between ULIPs and mutual funds.
Difference between ULIPs and Mutual Funds
ULIPs bundle insurance with investment, whereas mutual funds are purely investment products managed by mutual fund houses. At a glance, both seem similar, as both involve market-linked investments, but the confusion starts because both use similar terms, like net asset value (NAV), returns, lock-in periods, etc.
Also, the mis-sellers often muddy the waters with the feel-good pitch of “You get the best of both worlds. It’s insurance plus investment.”, while selling ULIPs. What they don’t highlight are the higher charges, less liquidity, mediocre returns, etc.
To clear the confusion, look at the comparison between them.
A quick comparison table: ULIPs vs Mutual Funds
| Feature | ULIPs | Mutual Funds |
|---|---|---|
| Investment + Insurance | Yes (Bundled) | No (Pure investment) |
| Product type | Insurance product | Investment product |
| Lock-in period | Typically 5 years | No (except for ELSS, which is 3 years) |
| Charges | Higher (approx. 15%), layered charges* It includes admin charges plus fund management | Lower, transparent It includes expense ratios. |
| Liquidity | Low | High |
| Returns | Market-linked, post charges | Market-linked |
| Tax benefits | Up to ₹1.5 lakh under Section 80C of the Income Tax Act Maturity amount is tax-free under Section 10 (10D) | Only ELSS under Section 80C |
Scroll right to view full table →
*Key charges include premium allocation charges (the highest, around 12.5%, annually), mortality charges, policy administration charges, fund management charges, and additional fees for switching, surrendering, withdrawal, premium redirection, or any other additional charges like rider charges.
So, how do they do this?
How ULIPs are mis-sold as mutual funds
The confusion around ULIPs and mutual funds creates a bubble where customers struggle to come out. By the time that bubble bursts, it’s often too late, and the customers are left wondering, “how did this happen?”.
Consider a real case. A salaried professional in his 40s was mis-sold a ULIP, instead of a new fund offer (NFO), which was what that professional originally wanted. In the mutual fund context, an NFO is simply the launch of a new fund scheme, where investors can buy units at an introductory price. It sounds like a limited-time opportunity, and the mis-sellers often frame it that way to create urgency.
What the professional didn’t know was that this particular NFO, but a ULIP. The salesperson never used that term. He spoke about market-linked returns, the benefit of getting in early, and how this was a smart move for someone at his stage of life. The product and its charges were never explained. He signed the documents trusting the agent’s word. It was only later, when he tried to access his money during a financial emergency, he realized the truth. His funds were locked in, and withdrawing early meant steep surrender penalties.
This is how mis-selling works, through selective information, unfamiliar terminology, and the trust people place in someone sitting across the desk. Salespeople take advantage of this knowledge gap of customers, using misleading sales pitches that sound convincing but blur the truth.
Here are some common ones you need to watch out for.
ULIPs mis-selling sales pitches
1. “It’s like a mutual fund but better.”
In the investment world, there’s no such thing as “but better”. Every product has a specific goal and design. It depends on what your financial goals are. A mutual fund is built purely for building corpus in the long run. Calling one better than the other ignores the fact that they serve different purposes entirely.
2. “It’s tax-free and gives better returns than mutual funds.”
Be cautious. The tax benefit under Section 80C applies to premiums paid, but the returns are not guaranteed to outperform mutual funds. Returns depend on market performance, fund management fees, mortality charges, and several other deductions. No one can predict that you will get better returns. And anyone who says otherwise is making a promise the market cannot keep.
3. “Just invest ₹5,000 monthly like a SIP.”
Agents use this term to make ULIPs sound similar and straightforward. But an SIP is a method of investing regularly in a mutual fund. It is not a product category. Calling a ULIP premium an “SIP” is misleading. In mutual fund SIPs, your amount gets invested. In a ULIP, a portion is deducted upfront as charges before any investment happens.
4. “ULIPs work like bank fixed deposits.”
Fixed deposits offer guaranteed returns at a fixed interest rate, regardless of market conditions. ULIPs do not. Your money is invested in market-linked funds, which means the value can go or down. Comparing these two creates a false sense of safety that can lead to serious financial disappointment.
5. “Double your money with ULIPs.”
Such promises are very risky and resemble gambling. No regulated financial product can guarantee that your money will double by a specific date. Your financial goals should be based on realistic planning, not some speculative claims like “double your money”. If a salesperson uses this line, it’s a strong signal to walk away.
6. “You get insurance for free.”
Insurance in a ULIP is never free. A portion of your premium is allocated towards the life cover, and this is deducted through what are called mortality charges, which increases as you age. The remaining amount goes into investment funds, after further deductions for fund management and administration. Nothing’s free here; you are paying for every component.
Also read: Financial mis-selling: A step-by-step guide on how to spot risky products
A quick checklist to protect yourself
- Define your goals. Do you want insurance or an investment?
- Ask direct questions about the type of product (mutual fund or ULIP), fees, returns, and lock-in period.
- Ask for product documents and read them carefully before signing them.
- Consult a Qualified Financial Advisor (QFA) to get proper guidance on your financial decisions.
You have probably heard Benjamin Franklin’s quote, “An investment in knowledge always pays the best interest”. When it comes to your money, it’s spot on. Acquiring knowledge about the product before investing will give you long-term benefits instead of setbacks. The examples we looked at perfectly show how true that proverb is. So, be financially aware and ask questions before investing.
