NISM-Series-X-B: Investment Adviser (Level 2) · Life Insurance Products

Unit Linked Insurance Plans (ULIPs) for NISM X-B

Updated 11 October 2026 · Fact-checked

A ULIP is a life insurance policy that splits your premium between life cover and market-linked funds. You choose the fund, bear the investment risk and pay charges that reduce units. To solve questions, identify the charge type, the lock-in rule, the switching rule, or the comparison point being tested.

Understand Unit Linked Insurance Plans (ULIPs)

A Unit Linked Insurance Plan (ULIP) combines life insurance with investment. You pay a premium. After charges are deducted, the rest buys units in a fund you select. The fund has a Net Asset Value (NAV), and the value of your policy is the number of units × the NAV.

The key point is who bears the risk. In a ULIP, the policyholder bears the investment risk. The insurer does not guarantee the fund value. In a traditional plan, the insurer declares bonuses or guarantees benefits and carries more of the investment risk.

Charges are the heart of the topic. Typical charges are premium allocation charge (deducted from the premium before units are bought), mortality charge (the cost of life cover, which usually rises with age), policy administration charge, fund management charge (built into the NAV) and switching or partial withdrawal charges where applicable. Most of these are met by cancelling units, except the fund management charge, which is reflected in the NAV. Read the question to see which one is asked.

Fund options usually range from equity and balanced funds to debt and liquid funds. Switching lets you move money between funds within the same policy, for example from equity to debt as a goal nears. Insurers commonly allow a number of free switches each year, with a charge beyond that. Check the policy document for the exact number.

ULIPs have a lock-in period of five years under IRDAI rules. During this time you cannot fully surrender and take the money out. Partial withdrawals are generally allowed only after the lock-in. Compared with a mutual fund, a ULIP has a lock-in, gives life cover, and has a different charge structure. A mutual fund has no insurance cover and (for open-ended schemes, other than ELSS) no lock-in.

Key formulas to remember

Policy fund value: Fund value = Number of units × NAV; Units are credited after the premium allocation charge is deducted.
Amount invested from a premium: Amount invested = Premium − Premium allocation charge; Other charges such as mortality and administration are usually met by cancelling units.
Units purchased: Units = Amount invested ÷ NAV; NAV is the unit price on the allocation date.
Lock-in rule: Lock-in = 5 years; Applies to ULIPs under IRDAI rules. Partial withdrawal is generally allowed only after it.
Risk bearer: ULIP: policyholder bears investment risk; The insurer does not guarantee the fund value.

How to solve Unit Linked Insurance Plans (ULIPs) questions

Use this method for any ULIP question, whether it is theory, a charge or a comparison.

1Read the last line first. Is it asking about structure, a charge, lock-in, switching or a comparison?
2Underline the keywords: who bears risk, which charge, before or after lock-in, which product is compared.
3If numbers are given, deduct the premium allocation charge first to find the amount invested.
4Convert to units by dividing by NAV, or to value by multiplying units by NAV.
5Apply the rule: five-year lock-in, free switches within the policy, policyholder bears investment risk.
6For comparisons, list the difference on insurance cover, lock-in, risk, charges and tax in your head.
7Eliminate options that say the insurer guarantees the fund value or that remove the lock-in.
8Recheck units, NAV and charges before choosing.

Quickest way: Charge, risk and lock-in check

When to use it: Use this for one-line theory questions when time is short.

Ask: does the option say the insurer guarantees the fund value? If yes, reject it.
Ask: does it treat the lock-in as shorter than five years or absent? Reject it.
Match the charge name to its job: allocation is on premium, mortality is for cover, fund management is in NAV.
For ULIP vs mutual fund, the ULIP is the one with life cover and a lock-in.
Pick the option that stays closest to the policyholder bearing the risk.

Common mistakes in Unit Linked Insurance Plans (ULIPs)

Saying the insurer guarantees the ULIP fund value.
Students mix ULIPs with traditional plans that declare bonuses.
Fix: Remember that the policyholder bears the investment risk in a ULIP, because the value follows the NAV.
Applying all charges to the premium.
The word charges feels like one deduction.
Fix: Only the premium allocation charge comes off the premium. Mortality and administration are usually met by cancelling units, and fund management is inside the NAV.
Confusing the ULIP lock-in with the three-year lock-in of ELSS.
Both are tax-linked products with lock-ins.
Fix: Fix ULIP at five years and ELSS at three years as separate facts.
Treating a switch as a surrender.
Both involve moving money out of a fund.
Fix: A switch moves money between funds within the same policy and the policy continues. A surrender ends the policy.
Thinking a mutual fund also offers life cover.
Both invest in market-linked units.
Fix: Only the ULIP bundles insurance cover. A mutual fund is a pure investment product.

Worked examples

Example 1

A ULIP premium of ₹1,00,000 has a premium allocation charge of 5%. The NAV on the allocation date is ₹20. How many units are allocated, ignoring other charges?

Show the solution

Premium allocation charge = 5% × ₹1,00,000 = ₹5,000.
Amount invested = ₹1,00,000 − ₹5,000 = ₹95,000.
Units = ₹95,000 ÷ ₹20 = 4,750.

Answer: 4,750 units

Example 2

Which statement about a ULIP is correct? (A) The insurer guarantees the fund value. (B) The policyholder bears the investment risk. (C) There is no lock-in period. (D) Switching between funds ends the policy.

Show the solution

A is wrong because the fund value follows the NAV and is not guaranteed.
C is wrong because ULIPs have a five-year lock-in.
D is wrong because a switch moves money between funds within the same policy.
B matches the core ULIP feature.

Answer: (B) The policyholder bears the investment risk.

Exam tips

Expect questions on who bears risk, the lock-in period and the purpose of each charge.
For ULIP vs mutual fund, focus on insurance cover, lock-in and charges.
In calculation questions, deduct the allocation charge before dividing by NAV.
Negative marking is 25% of the marks for the question, so skip a question only if you cannot eliminate at least two options.
Watch for options with absolute words such as always or guaranteed.

Practice questions from Life Insurance Products

Unit Linked Insurance Plans (ULIPs): frequently asked questions

What is the lock-in period of a ULIP?

The lock-in period is five years under IRDAI rules. You cannot fully surrender and take the money out during this time. Partial withdrawals are generally allowed only after it.

What is the difference between a ULIP and a mutual fund?

A ULIP gives life cover along with investment and has a five-year lock-in. A mutual fund is a pure investment product with no insurance cover. Their charge structures also differ.

Which ULIP charges should I remember for the exam?

Remember premium allocation charge, mortality charge, policy administration charge, fund management charge and switching or withdrawal charges. Know what each is deducted from and what it pays for.

What is switching in a ULIP?

Switching lets you move money between the fund options within the same policy. Insurers often allow some free switches a year, with a charge beyond that. Check the policy document for the exact limit.