A Unit Linked Insurance Plan (ULIP) is a type of life insurance where you get an insurance plan and investment plan in one policy. It is a two-in-one instrument where a part of your money is used to provide the policyholder with a life cover and the other half is invested in the funds of your choice. The premiums you pay are utilized for both – providing insurance and generating returns on investments. In case of the demise of the policyholder within the tenure of the ULIP, the nominee will receive a sum assured. While if the policyholder survives the tenure of the policy, they receive maturity benefits. What is a ULIP policy? It is a combination of investment and insurance. If you are planning to purchase a ULIP plan, it is important to understand the investment component of it.
ULIPs as investments
When you buy a ULIP policy online, the insurance company invests half of the premiums you pay in funds of your choice. A ULIP allows you to choose the allocation of your funds based on your risk appetite. Broadly, there are three categories to choose from: equity, debt, and balanced funds. If you invested in equity funds, your money is allocated to equity markets. These are high-risk funds and often offer high returns. If you are looking for a low-risk option, a debt fund is ideal where your money is invested in government and corporate bonds. If you are looking to allocate some of your funds in debt and some in equity funds, a balanced fund would be an ideal choice. They have moderate risks as your money is invested both in debt and equity. They balance the risk and provide moderate returns. Use a ULIP calculator to understand your investment and probable returns on it so you can plan your purchase accordingly. Also, ULIPs usually have a lock-in period of 5 years. Most insurance companies allow partial withdrawals of ULIPs after this period. This feature is what makes a ULIP useful during emergencies.
Meaning of absolute returns
When you invest by allocating assets, the returns that you get on them over a specific period are known as absolute returns. This reflects the appreciation or depreciation of assets in which you have invested in it. These assets can be stocks or mutual funds. The meaning of absolute returns in simple terms is the total return, profit, or loss a portfolio has made in a specific time. Depending on the profits or losses generated by the stocks and mutual funds allocated in a portfolio, you will know the absolute returns of an investment.
ULIPs and absolute returns
Use a ULIP calculator before buying one, to get an estimate of the returns on your investments. While determining the returns of ULIP, first take into consideration the various charges that are deducted for that ULIP scheme. These include surrender charges, fund management charges, administrative charges, and mortality charges.
When you are investing in ULIP, there are two ways you can measure the progress of your ULIP investment. Some investors choose the Compounded Annual Growth rate (CAGR) formula. While most investors prefer finding the absolute returns of a ULIP to understand its performance. Absolute returns of a ULIP reflect the returns an asset allocation has made over a specific tenure. It indicates whether the investment has gained or lost, appreciated or depreciated over a specific time. It is usually calculated in percentages. To calculate the absolute returns of your ULIP, you need to know the current Net Asset Value (NAV) of your ULIP scheme and the initial NAV of your scheme. With these two components, you can calculate the absolute returns of your ULIP with three simple steps-
- Subtract your initial NAV from the current NAV of your ULIP
- Divide the resulting value by your initial NAV
- The number you get, multiply it by 100
The number derived is the percentage of absolute returns of your ULIP. Absolute returns concern themselves with only positive results and do not align with any traditional benchmarks. It is the opposite of relative returns, where the returns, both positive and negative, are considered on the basis of a fixed benchmark. When you buy a ULIP plan online, calculating its absolute returns over a period is an effective way of measuring the returns of your investments. This method is especially useful to those who have invested in ULIPs for the short term.