Do ULIPs offer guaranteed returns?

Unit Linked Insurance Plans (ULIPs) are not new to the insurance market. Their history can be traced back to the early 1970s. The first ULIP was launched in India by the Unit Trust of India (UTI) in 1971. The next one was launched by LIC Mutual Fund nearly two decades later, in 1989. After that, the ULIP segment in the insurance sector grew rapidly. Today, all the top insurers in India offer their own range of ULIP plans.

But if you are a risk-averse investor, there is one question that is likely to be taking up the most space in your thoughts. And that is - Do ULIPs offer guaranteed returns?

To answer this question, we need to begin at the basics.

What is a ULIP?

A ULIP or a Unit Linked Insurance Plan is a kind of life cover that also offers the benefit of market linked investments. The primary goal of a ULIP insurance plan is to provide life coverage to you, the insured person, while simultaneously making it possible for you to create wealth over the long term. In exchange for these benefits, you must pay your insurance provider premiums on a regular basis, as is the case with all life insurance plans.

The returns generated from the market linked investments in ULIPs can help you achieve your long term life goals, like the purchase of your dream home, your children’s higher education, or even your retirement planning.

How do ULIPs work?

When you purchase a ULIP, you must choose the amount of life coverage you need as well as the period over which you need it. In addition to this, you will also need to choose the premium payment mode and the premium payment term, if you opt for a limited premium plan. Based on the particulars of your policy as well as other factors like your age, gender and more, the insurer will decide the premium.

As for the investment component of your ULIP policy, you can choose to invest in different funds available under the plan. This could be equity funds, debt funds, money market or liquid funds, or a combination of different assets. Depending on the way the markets move, the fund value will increase or decrease over the policy duration.

Now, in case something untoward happens to you during the policy term, the insurance provider will pay out the death benefits under the plan to your nominee. But if you survive the policy term, you will receive the fund value as payouts at maturity. This is how ULIPs help create long term wealth, since favorable market movements may result in significant returns at the time of maturity.

Returns in ULIP

The returns from the investment component in a ULIP Plan can be calculated in one of two ways. You can either compute the absolute returns, or you can calculate the Compounded Annual Growth Rate (CAGR). Whichever option you choose, you need the NAV of the units in your investment funds.

The NAV or the net asset value is simply the difference between the total value of the assets in the fund and the expenses incurred by the fund, divided by the number of units therein. As the value of the asset rises, so does the NAV of the ULIP units.

Given this information, let us see how you can calculate the returns in a ULIP policy.

Absolute returns

This shows you the point-to-point returns from your ULIP investment. Check out the formula to calculate this below.

Absolute returns = [(Current NAV – Initial NAV)÷ Initial NAV] × 100 So, for example, if the NAV was Rs. 100 when you purchased your ULIP, but it is Rs. 160 now, the absolute returns from your investment will be 60%.

Compounded Annual Growth Rate

The Compounded Annual Growth Rate or CAGR shows you the annual growth of your ULIP investment over a given tenure. This also uses a simple formula, as shown below.

CAGR = {[(Current NAV ÷ Initial NAV)(1 ÷ number of years)] – 1} x 100 So, for example, if the NAV was Rs. 100 when you purchased your ULIP, but it is Rs. 160 now, after 5 years, the CAGR will be calculated as follows: = {[(160/100)(1/5)] – 1} x 100 = {1.09856 – 1} x 100 = 0.09856 x 100 =9.856%

If this seems overwhelming, you can always use a ULIP return calculator to make this exercise easier.

So, do ULIPs offer guaranteed returns?

Now that you have seen how ULIPs work, let's turn our focus on the important question we set out to discuss. Do ULIPs offer guaranteed returns?

To understand this, let us see how insurers pay out the returns from a ULIP plan in case of the policyholder’s demise, as well as in case of maturity.

Scenario 1: In case of the policyholder's demise

In this case, the nominee will receive the payouts under the plan in one of the following two ways, depending on the terms and conditions of the plan.

• The higher of the sum assured or the fund value, or
  
• The sum assured plus the fund value

Scenario 2: In case of the policyholder's survival till maturity In this case, the insurer will pay out the fund value as it is to the policyholder. This is essentially the value of the investment as on the date of maturity of the plan.

So, as you can see from the scenarios above, ULIPs do offer guaranteed returns in case of the policyholder's death. This is because, in essence, they are life insurance plans. However, the amount of returns is not guaranteed in case of maturity, since they are market linked.

Reasons for popularity of ULIPS

Despite the apparent uncertainty of market lined returns, ULIP insurance plans are very popular among investors seeking to protect their family with one product. Here is a preview of these beneficial reasons.

• The dual advantage of insurance and investment
  
• Tax benefits under section 80C of the Income Tax Act, up to Rs. 1.5 lakhs
  
• Potential to create wealth with market linked returns over the long term
  
• Option to switch funds over the policy term to keep pace with market fluctuations
  
• Option for partial withdrawals

Conclusion

This sums up how ULIPs work and how the returns they offer, while guaranteed partially, cannot be quantified upfront. ULIPs come with a host of benefits for policyholders as well as their families. So, if you are on the fence about purchasing a ULIP, the information above should help you make an informed financial decision.

Read next: Ulips vs endowment plans

Before you purchase an insurance plan, it is always advisable to compare your options. That way, you know what kind of life cover is best for you. Speaking of comparisons, how do ULIPs stack up against endowment plans? Our blog on this subject can help you understand the differences better.

Read it here

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