Unit-Linked Insurance Plans (ULIPs) have always been a great long-term investment instrument for both new and experienced investors. Some new generation ULIPs have a consistent record of accomplishment when it comes to long-term investment strategy, resulting in theirwidespread popularity. Here, we will throw light on absolute ULIP returns.
What is a ULIP?
A ULIP is a combination of a life insurance plan and an investment instrument. Your insurer utilizes a portion of your premium in debt or equity funds. There is an option for a balanced fund too, where the investment is divided between both the funds. You can use a ULIP calculator to determine which kind of fund is more beneficial and invest accordingly. If the financial market or your risk appetite changes, you can switch between debt and equity funds to ensure your money keeps growing.
A ULIP generates two kinds of returns: Compound Annual Growth Rate (CAGR) and absolute returns. Read on to learn about the latter.
What are absolute returns?
Absolute ULIP returns are the earnings that a ULIP investment generates over a specific period. These returns help to measure the asset’s appreciationor deprecation over the policy term. Hence, absoluteULIP returns can indicate both profit and loss, depending on whether the equity or debt fund successfully grew your investment or reduced in value over time.
How are absolute returns calculated?
The calculation of absolute ULIP returns is done with respect to your ULIP’s initial and current Net Asset Values (NAVs). The absolute return is a percentage of the ULIP’s initial NAV. This helps you understand how the ULIP has performed over the entire investment term, especially if you stay invested for a comparatively short period.
Let us understand this better with an example. Consider that your ULIP’s initial NAV was INR 100 and the current NAV is INR 150. This means the ULIP has offered a 50% hike over the investment period, which represents the absolute growth of the policy. You can use this calculation to determine the ULIP’s absolute growth at any moment during the policy term.
However, keep in mind that the NAV depends on the insurance company’s ULIP chargesas well. These costs include fees for policy administration, fund management, mortality, and premium allocation. Moreover, the absolute returns can help only in case of capital investment, and not when it is a compounded investment.
Why you should invest in ULIPs
Considering there is a plethora of investment alternatives available, you may wonder why to opt for a ULIP. The most significant advantage of a ULIP is that it is a life insurance policy. The plan ensures the financial security of your loved ones in case you cannot be there for them due to an unfortunate event. However, unlike other life insurance policies, ULIPs offer the chance to grow your money. It is a long-term investment option that accumulates substantial fortune over the policy period. This facility makes it easier to set important financial goals, like creating a respectable retirement fund and ensuring that you have enough money to provide your children with high-quality education.
ULIP returns depend on the performance of the financial market, but the policy offers you the flexibility to manage your investment accordingly. You can switch between debt and equity investment funds, depending on which is faring better during a specific period. Additionally, you can shift the funds if your risk-taking ability changes over time.
Lastly, ULIPs are a useful tax-saving instrument. Section 80C of the Income Tax Act, 1961, allows an annual tax deduction of up to INR 1.5 lakh on the premium paid towards the ULIP.In addition,the returns generated from the policy are tax-free according to Section 10(10D) of the Act.
If you are convinced of these benefits and plan to invest in a ULIP, consider using a ULIP calculatorto compare among different policies and find the most suitable one.