ULIP Returns in 5 Years

What is a 5-Year ULIP plan?

A 5-year ULIP plan blends the features of life cover and market-based investments for a period of 5 years. A 5-year ULIP plan acts as a hybrid tool and offers financial security with wealth creation for a period of 5 years. During this tenure, you can choose from various funds based on your financial goals and risk tolerance. Most ULIP plans have a 5-year lock-in period. Thus, the returns accumulated during the first 5 years can help a person decide the future direction of their funds as per their goals. 

How Does a 5 Year ULIP Work?

A five-year ULIP works through a structured process of premium allocation, unit-based investment and a mandatory lock-in period. The following points summarise how a ULIP investment made for 5 years works:

• Premium Payment and Allocation: The premium that you pay is divided into two separate parts: one of these parts is used to insure your family through life cover. The other bucket is invested into the market for returns.
• Fund Selection and Unit Allocation: You can choose from the various funds offered by the ULIP Plan. These funds are generally of three types
  • Equity fund
  • Debt Fund
  • Balanced Fund 
• Market-linked growth and deductions: The portion of money invested in the funds grows according to the performance of the market. Throughout the term, the insurer also deducts various ULIP charges by cancelling a certain number of units from your fund.
• Flexibility: Investors can choose between various funds offered by a ULIP plan. These plans also allow them to switch between the various funds as per their risk tolerance and financial goals.
• Payout: A ULIP is a long-term financial product and has a longer maturity term as per the terms and conditions of the plan. Most ULIP plans have a lock-in period of 5 years after which you can surrender the plan or make a partial withdrawal. However, if you let the plan mature, you receive the total accumulated fund value.

Example of 5-Year ULIP Plan Returns

You pay a premium of ₹1,00,000 per year in a ULIP plan. Out of this, ₹50,000 is kept aside as life cover for your family while the rest is invested in the market. 

• Investment Amount: Rs. 50,000 per year
• Investment Tenure: 5 years
• ULIP Plan: Tata Fortune Pro
• ULIP Fund: Tata Equity Fund (Aggressive)

Assuming that the average annual return is 10% p.a. and his policy fee is 1.5% p.a., using a ULIP Calculator, the estimated returns will be: 

• Invested Amount: Rs. 30 lakhs
• Total Maturity Value: Rs. 39 lakhs

Benefits of Investing in a ULIP Plan for 5 years

Let us learn the key benefits of a 5-Year ULIP Plan from the list mentioned below:

• Tax Advantages: ULIPs are highly tax efficient instruments of investing.
  • Income Tax Deductions: You can apply for deductions under Section 80C of the Income Tax Act. 
  • Tax-free Maturity: If the premium-to-cover ratios are met, your maturity amount is eligible for tax-free maturity under Section 10D of the Income Tax Act. 
  • GST exemption: After 2025, GST is not charged on ULIPs, which makes premiums 18% more affordable. 
• Short-Term Goal Realisation: Although ULIPs are a long-term investment tool, the 5-year horizon is ideal for shorter-term financial goals.
• Portfolio Diversification: You can assess the performance of your portfolio and the funds you have invested in after the 5-year lock-in period. You can critically analyse your returns and diversify your portfolio accordingly as per your financial goals and your risk appetite. 

What Affects ULIP Returns in 5 Years?

ULIP Returns are affected by the following factors:

• Market Performance: Market performance affects your overall returns considerably. If you buy units in a fund and the market performs well right after, you will generate more returns on your investment as compared to when you buy units in a fund and the market dips right after, this will lead to lower returns. 
• Fund Selection and allocation: You can choose between equity, debt and balanced funds. It is recommended to mix all funds to avoid risk and also generate high returns. An equity fund, although riskier, has higher return-earning capacity than a debt fund, which has less risk. 
• Policy-related charges: Various ULIP charges are also deducted from the fund as units. These charges include fund management charges, premium allocation charges etc.
• Investor strategy: The strategy of an investor also highly affects the final returns of a ULIP plan. An investor with a dynamic strategy can earn more returns on their premiums as compared to investors with stagnant investments throughout the 5-year period. Premium consistency also highly affects the final corpus because it is important to build growth through compounding. 

Conclusion 

ULIP Returns in 5 years can help you develop an investment strategy along with ensuring that your family is financially protected during the policy term. You can read about the best ULIP plans and select the best plan for you.