ULIP Policy: Discussing the returns and benefits

Unit Linked Insurance Plans or ULIP, as it is popularly known, is predominantly a mix of insurance with investment. The goal of these plans is to provide you with an option of wealth creation along with a life cover.

When you invest inthese plans, the insurance company dedicates a portion of your investment towards life insurance, while the rest of your investment is directed towards funds that are based on equity or debt or both. These fundsareselectedkeeping your long-term goals in mind.

Let us now discuss some of the benefits of ULIP Plans:

Life cover:

One of the primary benefits of these plans is that it acts as a life cover along with an investment instrument. It helps to create a financial security that a taxpayer’s family can fall back on. The finances received from ULIP can be used for emergencies in case the taxpayer meets with an unfortunate event such as untimely death.

Income tax benefits:

Another thing which not most people are aware of is that the premiums paid towards a ULIP plans are eligible for a tax deduction under Section 80C. Along with this, the returns of the policy on maturity are exempt from income tax under Section 10(10D) of the Income-tax Act, subject to certain conditions. This is considered as a dual benefit that you can claim with this policy.

FinancialLong-Term Goals:

We all have a dream of owning a house or a new car or getting married, etc. Such long-term goals required substantial funding. ULIP comes as a good option when it comes to fulfilling such long-term goals. Why? When you invest in this plan, your investment is compounded. As a result of which, the net returns which you receive can be higher than other investments. This remains unchanged even if you wish to exit after the 5-year lock-in period.

Switching Funds

These plans allow you – the investor – to switch your portfolio between debt and equity. This is done after calculating your risk appetite and the market’s performance. Such features of switching between funds help to give you a more stable return and resist the market tensions. This feature predominantly has contributed largely towards the popularity of these plans as an investment instrument.

How are the returns in this plan calculated?

Essentially, ULIP returns are calculated in two ways.

1. CAGR: Compound Annual Growth Rate returns
2. Absolute returns

The CAGR returns allow you to calculate the annual growth of your investments over a specified period. The formula used to determine these returns is:

CAGR = {[(Present NAV/Initial NAV) ^ (1/Number of years)]-1}*100

In the case of Absolute Returns, all you need to know is the NAV. The present NAV helps to determine the returns. The formula used to calculate these returns is:

Absolute returns = {(Current NAV – Initial NAV)/Initial NAV}*100

Today, there are many ULIP calculators that are available online. These calculators allow you to determine the approximate value of your investments in the future. All you need to do is fill in details such as:

• Premium payment frequency
• Capital amount
• Investment horizon
• Annual post-tax returns

The returns in a ULIP plans may vary depending on the market conditions. Ensure that you clarify this with the insurance company or your insurance advisor before you choose a plan.