ULIPs are one of the renowned investment options that combine the benefits of life insurance with debt & equity funds. These are insurance cum investment plans, allowing the investment of funds to meet your long-term financial obligations, along with providing life insurance coverage. The part of the premium amount paid is diverted towards the funds opted for, & the remaining amount is allocated towards life insurance. One can opt to invest in debt, equity, or both, depending upon the level of risk & your objectives, making it an ideal investment option. It offers a flexible option to switch between funds at any time during the policy tenure.
Factors Influencing ULIP Returns
Provided are the factors that influence ULIP returns:
- Market Returns:
The ULIP returns are entirely dependent on how the underlying funds perform in the market. When the market performs well, it provides higher returns, while if the market doesn’t perform well, it can adversely affect the value of the investment.
- Allocation of Funds:
The ULIP returns are also influenced by the allocation of funds, i.e. the proportion in which the premium amount is invested in equity, debts, or balanced funds. It attracts a higher risk if the premium amount is invested in equity, but offers higher returns. On the other hand &, debt funds attract lower risk with moderate returns.
- Fund Management Charges:
This plan attracts multiple charges, such as fund management fees, policy administration fees, mortality charges, etc. A high amount of charges will result in a lower amount of returns.
- Investment Horizon:
The returns are also affected by the period for which the funds are invested, i.e., the longer the tenure, the more time can be availed to deal with the market volatility.
- Flexibility:
This plan allows switching between the funds, further helping to deal with the market scenario, & hence enhancing the ULIP returns.
How to Increase the Returns on ULIP
Provided are the different ways in which the returns on ULIPs can be increased:
- Choosing the Relevant Funds
If you have a high risk acceptance level, opt for equity funds; if you prefer stability with moderate returns, opt for debt funds.
- Invest for a Longer Duration
To maximise returns, stay invested for a longer period, dealing with the market scenario & taking advantage of compounding power.
- Switching Between the Funds
This feature of flexibility helps an investor optimise returns according to the market situation of the funds, i.e. during downtime, opt for debts, & during a bull market situation, opt for equity.
- Monitoring the Performance
Keep an eye on the market performance of the ULIP & make necessary changes wherever required. Monitoring on a regular basis helps you make informed decisions & stay informed.
- Minimizing Charges
As there are multiple fees & charges associated with ULIPs, choose those plans that have lower fees, ensuring a larger amount remains invested.
How to compare ULIP returns with Other Investment Plans.
Provided are the different options available that will help compare returns on Unit Linked Insurance Plan with other investment plans:
- Assess Historical Performance
Assess the past performance of ULIPs in comparison to other investment options available in the market, such as PPF, FD, mutual funds, etc.
- Evaluate Risk & Return
Evaluate the risk-return profile of ULIPs in comparison to other investment options, mainly in the case of equity funds. This is because equity funds offer higher returns, but come with high risks due to their being linked to the market.
- Consider Tax Benefits
Take into consideration the associated tax benefits against other investment plans available. ULIPs offer a deduction of tax u/s 80C on the amount of premium paid, & an exemption of tax u/s 10(10D) on the maturity proceeds, increasing the value of returns.
- Review Fees & Charges
The higher the fees & charges, the lower the value of returns; hence, evaluating the associated fees & charges well in advance is advised.
- Check Flexibility & Liquidity
Check for the flexibility of available plans in terms of switching between the funds during the tenure, which ULIP offers without any additional fees or charges.
Steps to Calculate ULIP Returns
Provided are the steps to be followed to calculate the returns on the Unit Linked Insurance Plan
Step 1: Check the Value of the Fund
Assess the present Net Asset Value, i.e. NAV of the fund.
Step 2: Use the Formula for Return Calculation
Use the formula mentioned below to calculate the returns on ULIP.
Returns on ULIP (%) = [(Current NAV – Initial NAV) / Initial NAV] * 100
Step 3: Consider the Associated Charges
To ascertain the actual amount of returns, deduct the associated policy charges & fees.
Step 4: Compare the Performance of Funds
Evaluate how your plan offering high returns performs against the key market indices.
Taxation Benefits
Provided are the taxation benefits on ULIP returns:
- Deduction on Premium Amount
ULIPs are eligible to claim a deduction of tax on the amount of premium paid u/s 80C of the Income Tax Act, 1961, maximum up to INR 1.5 lakhs.
- Exemption of Maturity Proceeds
On or after Apr 1, 2012, the maturity proceeds will be exempt from tax u/s 10(10D) if the amount of annual premium is not above 10% of the sum assured.
- No Capital Gains Tax
The returns on ULIPs do not attract any capital gains tax.
- Tax-Free Partial Withdrawals
The withdrawals made partially are also not taxable, subject to certain terms & conditions.
Conclusion
Having a better understanding of returns of ULIP & actors that have an impact helps make well-informed decisions. To maximise the ULIP returns & maintain a financially secure future, it is advised to choose the appropriate plan, remain invested for a longer tenure, & assess the associated fees & charges. Also, you can compare the returns on ULIP & other investment options available to help evaluate the performance of funds against your financial objectives. It requires you to monitor regularly & stay disciplined to ensure that the returns are well aligned with your financial objectives.
