Do ULIPs and Money Back life insurance policies benefit you?

Abraham Cherian
Oct 28
14 min read

Your Money Deserves Better

Every month, thousands of families across India faithfully pay their insurance premiums, believing they're building financial security. But what if your insurance policy is actually working against you?

You're not alone. Millions of Indians have purchased money back policies and Unit Linked Insurance Plans (ULIPs) believing they're making smart financial decisions—protecting their families and building wealth simultaneously. Yet years later, many discover a troubling reality: their returns barely outpace inflation, hidden charges have eaten into their corpus, and their family's actual protection is woefully inadequate.

Here's the uncomfortable truth: The intersection of insurance and investment often creates a product that does neither job particularly well.

But there's hope. This comprehensive guide will walk you through understanding what went wrong, how to evaluate your situation, and most importantly, what you can do about it right now.

The Hidden Problems Lurking in Your Policy

Money Back Policies: The Illusion of Returns

Money back policies sound attractive on paper. You get periodic payouts during the policy term, plus life coverage. What's not to like?

The trouble begins when you look beneath the surface. These policies typically deliver returns between 3-5% annually—barely enough to keep pace with inflation. That means your money is effectively losing value over time. Imagine putting aside ₹50,000 every year for 20 years, only to discover that the purchasing power of your maturity amount is less than what you could have bought with your first-year premium.

The deeper problem lies in how these policies are structured. Because a significant portion of your premium goes toward funding those survival benefits you receive periodically, less money is available for actual life insurance coverage. Many families end up critically underinsured. You might feel proud of your ₹25 lakh money back policy, but if your actual insurance need is ₹1.5 crores based on your family's expenses and goals, you're leaving an enormous protection gap.

Then there's the cost consideration. Compared to pure term insurance, money back policies can cost 20-30 times more for the same coverage amount. Picture this: a ₹1 crore term policy might cost you just ₹9,416 annually. An endowment-type money back policy for the same coverage could cost over ₹3,16,000. That's a staggering difference—money that could have been invested for your retirement, your children's education, or financial independence.

Finally, those fixed payouts you receive lose their shine over time. A ₹2 lakh payout might feel substantial in year 5 of your policy, but by year 20, inflation has eroded its real value significantly. What bought your family a comfortable lifestyle years ago now barely covers a few months of expenses.

ULIPs: The Complexity Tax

Unit Linked Insurance Plans promise the best of both worlds—insurance protection combined with market-linked investment returns. Unfortunately, they often deliver a compromised version of both.

The complexity of ULIPs hides a web of charges that can severely impact your returns. Not all your premium goes toward investment. In the early years, only 60-70% might actually get invested. The rest disappears into premium allocation charges, policy administration costs, fund management fees (typically 1-2% annually), and mortality charges that increase as you age.

Let's put this in perspective. If you're paying ₹1 lakh annually as premium, and ₹30,000 is consumed by various charges in the early years, you're actually investing only ₹70,000. Now apply a 1.5% annual fund management charge to your accumulated corpus, plus increasing mortality charges. Combined, these charges can consume up to 60% of your potential returns over a 15-year period.

Then there's the lock-in trap. ULIPs come with a mandatory 5-year lock-in period. Life doesn't wait for lock-in periods to end. If you need to access your money during this time—perhaps for a medical emergency, a business opportunity, or because you've realized the policy isn't serving you well—you'll face discontinuance charges and your funds will be moved to a discontinued policy fund earning a minimal 4% interest.

The life coverage component is another disappointment. Because a large portion of your premium goes toward investment, the actual life insurance coverage in ULIPs is typically much lower than what you could get from a pure term insurance plan for the same premium. You end up neither adequately protected nor optimally invested.

Perhaps most frustrating is the lack of flexibility. Unlike mutual funds where you can exit when market conditions deteriorate or your needs change, ULIPs lock you in even during market downturns. You're forced to wait out the lock-in period, potentially watching your corpus decline without the ability to protect it or redeploy the capital.

The Fundamental Flaw: Mixing Insurance and Investment

Financial advisors often use a simple analogy: trying to combine insurance and investment is like buying protective cricket gear bundled with a bat. If either piece doesn't meet your needs—if the pads are the wrong size or the bat is poor quality—the convenience of buying them together becomes irrelevant.

Insurance exists to protect income. Its job is to replace lost earnings if something happens to you, ensuring your family's goals remain achievable even without you. Investment exists to grow wealth. Its job is to build a corpus that outpaces inflation and helps you achieve specific financial goals like retirement, children's education, or buying a home.

When you combine these two fundamentally different financial tools, you often end up with inadequate insurance coverage that leaves your family vulnerable, suboptimal investment returns that lag behind simpler alternatives, and high costs that benefit the seller more than you. It's a compromise that looks convenient but ultimately serves neither purpose well.

Your Path Forward: From Trapped to Empowered

Understanding the problem is only the first step. Now let's talk about what you can actually do—whether you're stuck in year 2 or year 15 of your policy.

Conducting an Honest Assessment

Before making any decisions, you need clarity on where you actually stand. Start by asking yourself: what is my real life insurance need? Don't rely on what the agent told you or what felt like a big number when you bought the policy. Use the needs-based approach to calculate this properly.

Consider your family's annual expenses, minus your personal expenses. Add your outstanding loans and liabilities. Factor in future goals like children's education and marriage. Consider how many years of income replacement your family would need. For most working professionals with dependents, the requirement is typically 10-20 times annual income. If you earn ₹12 lakhs annually, you likely need ₹1.2 to 2.4 crores of life cover. How does your current policy stack up against this?Investment-Adviser-Level-2_book.pdf

Next, calculate the real return on your current policy. Don't rely on the rosy illustrations shown at purchase. Call your agent or company and ask for your current fund value (for ULIPs) or guaranteed maturity value (for money back/endowment plans), total premiums paid so far, and years remaining in the policy. Calculate your actual Compound Annual Growth Rate (CAGR). If it's below 6-7%, your policy is barely keeping pace with inflation.

Finally, understand what you're paying for life insurance within this policy. For a money back or endowment policy, compare its premium with what a pure term insurance would cost for the same coverage. The difference is what you're "paying" for the investment component. If your endowment premium is ₹3,16,000 and an equivalent term plan costs ₹9,416, you're investing ₹3,06,584 annually through this policy. At what return? This math often reveals the true cost of convenience.

Knowing Your Exit Options

Based on how long you've held the policy, different strategies make sense. Let's walk through each scenario.

If You're in the Early Years (Years 1-3)

The reality is harsh: you'll face the steepest losses if you exit now. Most charges in insurance-cum-investment products are front-loaded, meaning your policy has very low surrender value in early years. But sometimes cutting your losses early is still the right decision.

For ULIPs, if you stop paying within the 5-year lock-in, your funds move to a discontinued policy fund. You'll get your money back only after the lock-in ends, earning around 4% annually with a 0.5% management charge. You'll also face discontinuance charges of ₹3,000-₹6,000 depending on your premium amount. This makes sense if your ULIP has high charges and poor fund performance, and you want to cut your losses early and redirect future premiums to better alternatives.

Alternatively, you could continue the existing policy but resist adding any riders or top-ups. Meanwhile, start a proper term insurance plus mutual fund or direct equity strategy for any new investments. This approach works well if you're close to completing 3 years, as reaching this milestone gives you a better surrender value and fewer tax complications.

Some policies also allow you to take a loan against the surrender value. This lets you access liquidity without actually surrendering, though you'll pay interest on the loan. It's a bridge option when you need funds but want to preserve the policy for now.

If You're in the Middle Ground (Years 3-7)

You've crossed the most expensive phase. Your policy now has meaningful surrender value, but you're also closer to breaking even if you continue. This is where careful calculation becomes critical.

Once you complete 5 years in a ULIP, you can surrender without discontinuance charges and receive the full fund value tax-free. For traditional plans, after 3 years, you'll get guaranteed surrender value, typically 30-40% of premiums paid initially, increasing to 90% near maturity.

Here's the math you absolutely must do: calculate the opportunity cost. If you surrender now and invest the surrender value plus future premiums in a low-cost mutual fund SIP earning 12%, will you be better off in 10-15 years compared to continuing the policy?

Consider an example. Your ULIP fund value after 5 years is ₹6,12,000 and you've paid premiums of ₹5,00,000. If you continue for 10 more years, the projected value might be ₹18-20 lakhs. But if you surrender and invest that ₹6,12,000, plus redirect your annual premium of ₹1,00,000 into mutual funds earning 12%, your potential value could be ₹28-30 lakhs. That ₹10 lakh difference represents the true cost of staying in an underperforming product.

Another option is making the policy paid-up. For traditional plans, if you stop paying, the policy continues with proportionately reduced sum assured. If you paid 5 years of a 20-year policy with ₹10 lakh sum assured, your paid-up sum assured becomes ₹2.5 lakh. This makes sense if surrendering gives you very low value but you don't want to commit more premiums.

You could also adopt a hybrid approach: complete the existing policy but invest all new savings in proper term insurance plus separate investments. This limits your losses while not taking the surrender value hit.

If You're in the Final Stretch (Years 8+)

You've weathered the storm of high early charges. The question now is whether continuing makes sense versus deploying your corpus elsewhere.

If you're in the last 5-7 years, the opportunity cost of exiting might exceed the benefit, especially considering that surrender value will be 70-90% of premiums paid, you'll lose any loyalty bonuses or guaranteed additions, and tax implications might apply on surrender (though post-5-year ULIP surrenders are tax-free).

However, if your policy still has 8-10 years to go and your calculations show significant opportunity cost, surrendering might still make sense. Invest the surrender value in a well-diversified portfolio aligned to your goals. The compounding benefit of better returns over 8-10 years can be substantial.

Building the Right Alternative Structure

Whether you exit now or continue your existing policy, moving forward requires getting your protection and investment strategy right. Think of it as a two-bucket approach.

The first bucket is pure protection through term insurance. Get adequate life insurance coverage—typically 15-20 times your annual income, for a term until your retirement age or until major financial goals are met. The cost is remarkably affordable. A ₹1 crore coverage for a 35-year-old might cost just ₹10,000-15,000 annually. This ensures your family gets proper financial protection if something happens to you, without the investment component diluting the coverage.

The second bucket is wealth creation through separate investments. Invest the savings (the premium difference between term and money back/ULIP) in appropriate instruments based on your goals.

For long-term goals beyond 10 years like retirement or children's higher education, consider equity mutual funds via SIP, direct equity if you have knowledge, or Public Provident Fund for tax-free returns. For medium-term goals between 5-10 years like a house down payment or children's schooling, look at balanced or hybrid mutual funds, debt mutual funds, or fixed deposits for stability. For short-term needs under 5 years like an emergency fund or upcoming expenses, use liquid funds, debt funds, or bank deposits.

The power of separation becomes clear when you run the numbers. Consider the combined approach: ₹3,00,000 annual premium in a money back policy or ULIP. Compare that to the separated approach: ₹12,000 for term insurance plus ₹2,88,000 in mutual funds. After 20 years, assuming 12% return on mutual funds, the combined approach might give you ₹70-80 lakhs. The separated approach could deliver ₹2.1-2.3 crores. The difference of over ₹1.4 crores represents the true cost of that convenient combination product.

Handling the Emotional and Practical Challenges

Making these changes isn't just about numbers. There are real emotional and practical hurdles you'll face, and acknowledging them helps you move past them.

You might feel that you'll lose all the money you've already paid. This is the sunk cost fallacy at work. The premiums you've already paid are gone—your decision should be based on which path forward gives you the best outcome from today. Think of it this way: if you've been driving on the wrong road for 3 hours, do you keep going because you've already invested 3 hours, or do you turn around?

You might worry that your agent or relative who sold you the policy will be upset. Remember: this is your family's financial security. While maintaining relationships matters, your children's education, your spouse's financial independence, and your retirement security matter more. A professional financial advisor prioritizes your interests. If someone's upset that you're making a better financial decision, question whose interests they're really serving.

You might believe these policies have insurance so you're protected. Check your actual sum assured. For most money back policies and ULIPs, the life cover is woefully inadequate. A ₹50 lakh policy might feel like a lot, but if your annual family expenses are ₹6 lakhs, it provides less than 8 years of expenses—nowhere near the 15-20 years you need.

You might think that having completed 5 years, the tax benefits are safe. Yes, maintaining ULIPs for 5 years preserves tax-free maturity benefits under Section 10(10D). But is a tax-free mediocre return better than a taxable excellent return? Run the actual numbers post-tax before deciding.

Practically, start by requesting policy documents. Get your current policy illustration, fund value statement, and surrender value calculation in writing. Open a term insurance policy to secure adequate coverage before doing anything with existing policies. Consult a fee-only advisor to get objective analysis from someone who doesn't earn commissions. Make gradual changes—you don't have to exit everything immediately; create a phased plan. And document everything, keeping records of all communications and transactions.

The Special Case: When Money Back Policies or ULIPs Might Actually Work

In fairness, there are limited scenarios where these products might be the only or best available option. Let's be honest about when that applies.

When Health Conditions Prevent Term Insurance

If you have pre-existing medical conditions like diabetes, hypertension, heart disease, or other chronic illnesses, the term insurance landscape becomes challenging. Many insurers decline coverage for certain conditions. Others might approve you but charge premiums 3-5 times higher than standard rates. Some restrict coverage to lower sum assured amounts or shorter terms.

In such situations, money back policies or ULIPs that don't require stringent medical underwriting might be your only route to get some life coverage. However, even here, explore alternatives first.

Guaranteed issue life insurance products from some insurers offer simplified policies with no medical exam, though they come with higher premiums and lower coverage limits, typically up to ₹30-50 lakhs. Your employer's group insurance often provides coverage without individual medical underwriting, so maximize this if available. Some plans offer graded benefits, where coverage increases over time if no claims are made, helping you gradually build protection.

When Behavioral Lock-in Creates Forced Savings

Some individuals genuinely struggle with investment discipline. For them, the forced premium payment of these policies acts as a commitment device—the rigidity becomes a feature, not a bug.

But ask yourself honestly: Have you tried automatic SIPs in mutual funds? These provide similar forced discipline with better returns. Could accountability from a financial advisor help you maintain discipline with better investment choices? Is the cost of poor returns worth the discipline benefit? For most people, better alternatives exist that provide structure without sacrificing returns.

When Legacy and Estate Planning Simplicity Matters

In rare cases, certain life insurance structures offer estate planning benefits. For instance, policies under the Married Women's Property Act (MWP Act) protect proceeds from creditors. But this is a specialized need requiring expert guidance, not a reason for the average person to choose money back policies or ULIPs.

The Role of a Qualified Financial Advisor: Your Guide Through the Maze

Throughout this blog, one thing should be clear: these decisions are complex, personal, and have long-term consequences. This is exactly when professional guidance becomes invaluable.

Think about any significant challenge you've faced—learning a new skill, dealing with a health issue, navigating legal matters. In each case, expert guidance accelerated your progress and helped you avoid costly mistakes. Financial planning is no different.

A qualified financial advisor provides objective analysis. Unlike agents who earn commissions, a SEBI-registered, fee-only advisor's income comes from you, not from product companies. This alignment of interests ensures recommendations truly serve your needs.

They offer comprehensive planning. Your money back policy or ULIP isn't isolated. It connects to your other investments, loans, tax planning, retirement needs, children's education, and more. An advisor sees this full picture.

They provide behavioral coaching. Studies show that one of the biggest values advisors provide is keeping you from making emotional decisions during market volatility. They help you stay the course when your natural instinct might be to panic or make changes at the worst possible time.

They bring technical expertise. Calculating surrender values, opportunity costs, tax implications, comparing fund performances—these require specific knowledge and tools. Advisors do this regularly and can quickly analyze your situation.

They create accountability and monitoring. Financial planning isn't a one-time event. An advisor helps you review your progress, rebalance when needed, and adjust for life changes like marriage, children, career shifts, or health issues.

Research by Vanguard and others shows that professional financial advice can add 3-4% annually to your portfolio returns through behavioral coaching, tax efficiency, asset location, rebalancing, and spending strategies. Over 20-30 years, this difference compounds to hundreds of thousands or even crores of rupees.

Yet many people hesitate to pay a ₹25,000-50,000 annual advisory fee while unknowingly leaving ₹2-3 lakhs annually on the table through poor product choices, high fees, tax inefficiency, and behavioral mistakes. The math is clear: professional advice pays for itself many times over.

When looking for an advisor, verify they're registered as an Investment Adviser with SEBI. Confirm they work on a fee-only structure, charging you directly rather than earning commissions from products. Ensure they acknowledge their fiduciary duty to act in your best interest, not just offer "suitable" products. Look for someone who takes a comprehensive approach, examining your entire financial life rather than just investments. Demand transparency in how they explain recommendations, including alternatives and trade-offs. Consider credentials like CFP (Certified Financial Planner) or relevant qualifications.

You should especially consider consulting an advisor when evaluating whether to exit a policy, as surrender value analysis is complex. Seek guidance when you have multiple policies across insurance and investments to coordinate, when you face major life transitions like career changes, marriage, children, or inheritance, when your total investable assets exceed ₹25-30 lakhs, or when you feel overwhelmed or unclear about your financial direction.

The Bottom Line: Your Financial Story Can Change Today

If you've made it this far, you're already ahead of most people. You're asking hard questions, challenging assumptions, and seeking better outcomes. That's exactly the mindset that leads to financial success.

Your past decisions don't define your future. Whether you've been paying premiums for 2 years or 12 years, the best decision you can make is the one that optimizes your situation from today forward.

Adequate protection comes first. Nothing else matters if your family isn't protected. Get proper term insurance coverage before worrying about investment returns.

Simple usually beats complex. Separating insurance and investment isn't just theoretically better—it's practically better. It's clearer, more flexible, and historically delivers superior results.

Professional guidance is an investment, not an expense. The right advisor saves you multiples of their fee by helping you avoid costly mistakes and optimize your strategy.

Small changes compound over decades. The difference between a 4% return and a 12% return might not seem dramatic in year 1. But over 20-25 years? It's the difference between financial comfort and financial freedom.

Your financial well-being is too important to leave to chance, inertia, or unquestioned assumptions. The fact that you've invested time in reading this guide shows you're ready to take control.

The question isn't whether you can afford to make changes. The question is whether you can afford not to.