The financial year 2025 has introduced several regulatory updates that impact how individuals engage with investment-linked insurance options, particularly the ULIP plan. Unit Linked Insurance Plans (ULIPs) continue to be a preferred hybrid product, blending the benefits of investment with life insurance protection. However, recent tax reforms and industry shifts are prompting investors to reassess their strategies.
As the insurance landscape evolves, so too must the way policyholders evaluate their existing life insurance plans. Understanding what has changed this year is essential for those looking to maximize returns and maintain long-term financial protection.
Understanding the ULIP plan
A ULIP plan is a market-linked financial product that combines life insurance with investment. A portion of the premium provides insurance coverage, while the remainder is allocated to investment instruments such as equity, debt, or hybrid funds. This dual nature allows policyholders to build a financial corpus while ensuring security for their beneficiaries.
Over the years, ULIPs have been restructured to become more transparent and cost-efficient. Regulatory bodies have implemented reforms to protect investors, leading to better disclosures and a more streamlined fee structure. Despite this progress, investors must now navigate a new wave of tax and structural changes that may affect returns and eligibility for exemptions.
Key tax reforms affecting ULIP plans
One of the most significant changes this year pertains to how returns from ULIPs are taxed. Historically, ULIP proceeds were exempt from tax under Section 10(10D) of the Income Tax Act, provided certain conditions were met. However, this exemption has become narrower.
Starting in 2021, the tax laws were updated to remove exemptions for ULIP policies with annual premiums exceeding Rs. 2.5 lakh. In 2025, this rule has been expanded. Now, if your total annual premium for a ULIP exceeds 10% of the sum assured in any financial year, the maturity proceeds will attract long-term capital gains (LTCG) tax.
For investors, this means that high-premium life insurance plans that include investment components may no longer provide the same tax-free benefits as before. As a result, financial advisors now recommend structuring your ULIP portfolio with moderate premium levels to stay within tax-exempt limits.
Return of mortality charges
Another recent change involves the treatment of mortality charges. These are the fees deducted by insurers to provide life cover under the ULIP plan. Previously, these charges were not refunded to the policyholder. However, many insurance providers now offer a return of mortality charges at the end of the policy term, effectively enhancing the fund value at maturity.
While this change may seem small, over long policy durations, it can have a notable impact on the overall returns from your life insurance plans. When comparing ULIP products, investors should now consider whether the plan includes this feature, especially if long-term value creation is a goal.
Shift toward life-stage ULIPs
One of the emerging trends in the ULIP market is the growing preference for life-stage or age-based ULIP plans. These plans automatically adjust the asset allocation between equity and debt funds depending on the policyholder’s age or risk profile.
Early in the policy, a higher proportion of funds may be invested in equities to maximize growth potential. As the policyholder approaches retirement, the portfolio gradually shifts toward debt instruments to preserve capital. This built-in rebalancing reduces the burden of active fund management for the investor.
Life-stage ULIPs cater to individuals who want long-term market exposure but prefer a more passive investment strategy. They also align well with retirement planning goals or education savings, making them a smart addition to a diversified set of life insurance plans.
Strategies to adapt your ULIP plan
Given the evolving tax structure and changing investor preferences, rethinking your ULIP plan strategy is crucial. Consider the following approaches:
- Stay within tax-efficient thresholds: Avoid crossing premium limits that would disqualify you from tax exemptions under Section 10(10D). This may involve holding multiple policies with lower individual premiums rather than one high-value policy.
- Use top-up options wisely: Many ULIPs allow policyholders to add extra investments via top-ups. While this can increase returns during bullish markets, be cautious of breaching tax exemption thresholds when doing so.
- Monitor fund performance: ULIPs typically allow multiple free fund switches per year. Use this feature to shift between equity and debt funds based on market conditions, risk appetite, and financial goals.
- Review charges and flexibility: Not all ULIPs are created equal. Look for ULIP plans that offer low fund management costs, flexible premium redirection, and cost-free switching between funds.
- Plan for liquidity: While ULIPs have a lock-in period of five years, they are best suited for long-term goals. Avoid relying on them for short-term financial needs. Consider pairing them with other life insurance plans that focus on savings or guaranteed returns.
Regular vs. single premium ULIPs
In addition to changes in tax and investment strategy, policyholders must also decide between regular premium and single premium options. Regular premium ULIPs involve ongoing contributions and are well-suited for salaried individuals seeking discipline in savings. Single premium ULIPs, on the other hand, involve a one-time payment and are ideal for those who wish to avoid managing recurring payments.
Each option has its place within a broader portfolio of life insurance plans, and choosing the right one depends on cash flow, investment horizon, and risk tolerance.
Conclusion
The recent tax reforms and product innovations are reshaping the way investors approach their ULIP plans. While the core benefit of combining investment with insurance remains, maximizing returns now requires a deeper understanding of tax rules, product features, and strategic fund management.
For individuals seeking to build wealth while ensuring financial protection for their families, the ULIP plan remains a viable solution—but only when chosen and managed with care. As with any long-term financial commitment, reviewing your policy annually and consulting with financial professionals can help you make the most of your life insurance plans in 2025 and beyond.