How can ULIP calculator helps you simplify ULIP returns?

Author: Vikas Singh Gusain

ULIP stands for Unit Linked Insurance Plan which is an investment product offering by insurance companies. ULIP combines the features of a life insurance plan with investment. The investment portion of a ULIP is very similar to that of mutual funds. This has drawn a lot of comparisons between the two products.

Over the past several years ULIPs have emerged as a popular investment product and are giving a tough competition to Mutual Fund investments. Even though ULIPs have grown their market share, ULIP returns or rather how to calculate ULIP returns have been a vague and ambiguous topic so far. This in itself makes it difficult to choose a suitable ULIP policy.

Let us break down to ULIP basics before we introduce the ULIP calculator.

What are the components of ULIP?

  • Premium – Since ULIP is an insurance based product, the policyholder has to pay premiums to the insurance company. A small portion of the premium is kept aside for life insurance of the policyholder and the rest of the premium amount is invested by the insurance company in the stock market. The premium could be single pay, or annual, or half yearly, or quarterly depending on the choice made by the policyholder.
  • Lock – in period – The minimum lock-in period for a ULIP is 5 years. (This is an important point that every investor must keep in mind before buying a ULIP policy).
  • Policy period – The policy period in ULIP ranges from 5 years to 30 years.
  • Investment Ratio – the investment ratio in a ULIP is entirely dependent on the policyholder. Depending on the needs of the investor the insurance company invests in equity funds and debt based funds. Generally all ULIPs offer a mix of debt and equity. The risk appetite of the policyholder is the game changer for ULIPs. Most insurance companies offer a maximum of 80:20 equity to debt ratio to maximize the ULIP returns.
  • Income Tax Benefits – The premium paid for ULIP is deductible under Section 80C up to a maximum of INR 1.5 lacs. Also, the maturity amount is exempt!
  • Fees and Charges – On the flipside, ULIPs have a lot of fees and charges which need to be paid by the policyholder with every premium. Here are some of the items that come under fees and charges: Premium Allocation Charge, Mortality Charges, Fund Management Charges, Partial Withdrawal Charges, Fund Switch Charges and Policy Administration Charge.

As it is clearly visible, from the number of components that an investor needs to bear in mind when calculating ULIP returns, ULIP return calculation is a slightly difficult task. Due to these complications, many investors end up making a premature exit from their policies and suffer losses.

ULIP Calculators on Websites

Most insurance company websites are now well equipped with an "ULIP Calculator". This piece of technology gives a significant amount of clarity to current policyholders as well as potential investors. The website allows you to punch in the premium amount, the premium type (single pay/annual etc.), the investment mix you would like to follow (on a broad basis), and, the number of years you wish to stay invested in the ULIP. On the basis of this information the ULIP Calculator gives the investor an approximate idea of the returns both in % and in absolute numbers. Of course, since this is an ideal world type of scenario the numbers are only giving you a representative figure and are not accurate. But it is a great way to at least understand where you may be headed with this particular ULIP.

NAV of the ULIP

The Net Asset Value (NAV) of a ULIP defines the net worth of the ULIP for the policyholder. The insurance company provides the NAV of the policy with every quarterly statement. The NAV of the policy is bound to fluctuate every quarter since the investments are made in the stock market. But ULIPs which are based in the debt market will see a steady NAV throughout their tenure.

The formula to calculate the NAV as per the IRDA is as follows:

NAV = (Market Value of Investments held by the fund + Value of Any Current Assets) - (Value of Current Liabilities & Provisions) / Number of units existing at valuation date (before creation / redemption of any units)

Factors Influencing ULIP Returns

An ULIP with a 100% investment allocation is a myth. There are certain significant facets that influence the ULIP returns. These contribute to the reduction in yield from the ULIP.

  • The Premium Allocation Charge – This amount goes towards life insurance of the policyholder and is deducted from the total premium.
  • Mortality Charges – Based on the age of the policyholder the amount charged as mortality charges maybe higher or lower. The younger the investor the lower the mortality charges and vice versa.
  • Fund Management Charges – These will be deducted from the gross returns of the ULIP.
  • Policy Administration Charges – These charges are also deducted at a later stage from the gross returns.

Many a times the gross returns from an ULIP are high but the net yield of the ULIP is significantly lower. As an investor one must focus on the net yield, since that is the amount your investment is ultimately making. One can expect the returns from ULIP to be as high as 12% depending on the debt-equity ratio of the investment portfolio.

Policy Review

A policyholder should review their ULIP policy every six months. This means calculation of the NAV and net yield from the policy. In an ULIP, the investor can decide where the investment is made, namely, large cap stocks, mid cap or debt funds, and so on and so forth. Thus, an investor needs to keep a track of the stock market benchmarks such as NIFTY50, BSE100 etc.

On a whole, Microsoft Excel, a sharp mind, the right formula and accurate data could be the best ULIP calculator an investor could get!