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What Do You Mean by Absolute Returns in ULIP Plans

  5/30/20 6:56 AM

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ULIP or United Linked Insurance Plans are one of the most popular investments today. ULIP plans are a wise investment choice because they combine the best features of an insurance plan and a market-linked investment plan. In a ULIP policy, a part of your premiums is used to provide you with a life cover, whereas the remainder of your premiums is invested in market-linked securities comprising equity, bonds or balanced funds. The investment is made as per your risk appetite, financial goal and time horizon. These ULIPs generate a return over the policy tenure.

Here is everything you should know about how a ULIP works and generates returns.

What is an absolute return?

Absolute return is the rise in the value of the asset over a defined tenure. Absolute return can be positive (appreciation) or negative (depreciation) in the value of the asset. These assets refer to your investments in a ULIP, which can be stocks or mutual funds. So, in the concept of ULIP, absolute returns refer to the profit or loss of your ULIP plan portfolio in a given time horizon, usually a year.

How are ULIP returns calculated?

Typically, in the concept of ULIP, your returns are based on your investment assets as well as factors like ULIP charges and the market performance. You get various investment options such as large-cap, mid-cap, small-cap equity funds, or ultra-short bonds, secure funds, etc. You can choose the assets as per your preference. All funds vary in nature and carry different risks and rewards. Generally, high-risk funds, comprising more equity, offer higher returns, whereas low-risk funds, comprising bonds, offer stable returns.

There are two ways to calculate ULIP policy returns:

  • Absolute Returns: Absolute returns are calculated as per the net asset value (NAV) of your ULIP. Once you know the current NAV and the initial NAV (NAV at the time of purchase), you can easily apply the below formula to know your ULIP returns. Typically, NAV is the total value of your ULIP policy minus ULIP expenses such as fund management fees, surrender charges, operating charges, mortality charges, premium allocation charges, administrative charges, etc. 

Absolute Returns = [(Current NAV- Initial NAV)/Initial NAV] *100

For instance, if your initial NAV was ₹250 and the latest ULIP value is ₹350. In this case, your absolute return is 40% in a year. The absolute return method is most effective for estimating the ULIP performance when the investment horizon is short. However, this method has its disadvantages. The absolute return method only determines your returns as per the capital investment. In case the investment is compounded, the method becomes irrelevant. Hence, the absolute return method is useful only when calculating the returns during the initial years. You can use this particular approach to know your return at any point in time during the investment horizon.

  • CAGR (Compound Annual Growth Rate): Another method of calculating your ULIP returns is CAGR. The CAGR method evaluates the annual growth of your ULIP investments during a period.

CAGR = {[(Current NAV/Initial NAV) ^ (1/number of years)]-1} * 100

For instance, if your initial ULIP NAV at the time of purchase was ₹25 and after five years, the latest ULIP NAV is ₹35. Then, CAGR, in this case, is 6.96%. The CAGR method is relevant for calculating the return of ULIP for a longer duration. However, this approach is less popular as compared to the absolute return method because of its drawbacks. CAGR depicts the mean annual growth rate. It does not take into account the volatility of returns over a period of time. This method is a historical metric. 

That said, you can use an online ULIP return calculator to precisely know your ULIP return.

How to ensure high returns in ULIP insurance? Things to consider while buying ULIP insurance.

You can use the following tactics to generate goodhigh returns for your ULIP plan:

  • Balance your asset allocation in equity and debt to get better returns. As per experts, your equity investment should be based on your age. With increasing age, shift your asset allocation more towards debt and less towards equity to get safe returns. 
  • The best ULIPs allow you to switch between funds – equity and debt - without any cost. You can change your asset allocation as per the market to tap lucrative opportunities and avoid volatility.
  • Keep a check on the market to devise sound strategies such as investing or pulling out from equity or debt, overvaluation or undervaluation of the market, etc.

Wealth Secure+ from Edelweiss Tokio Life Insurance

The Edelweiss Tokio Life Wealth Secure+ plan gives you a secure life cover (until 100 years) and the opportunity to grow your savings. 

Some of the top features of this  Edelweiss Tokio Life  ULIP plan include:

  • Option to take an individual life cover, joint policy or a child plan throughout the policy.
  • Affordable premiums starting at ₹1,000 per month.
  • Option to enhance your policy through top-up premiums any number of times during the plan tenure.
  • Loyalty additions beginning from the 6th policy year along with Booster additions every 5th year at the end of the 10th policy year. 
  • Maturity additions at the end of the plan tenure.
  • The choice to get you maturity plan value over a certain period, such as retirement. You can choose to receive the payouts monthly, quarterly, half-yearly, or yearly, as per preference.
  • Freedom to invest only for five years. Withdrawals post the term can be partial or systematic.
  • The choice to invest in seven diverse funds.
  • Freedom to manage your portfolio on your own (with unlimited free fund switches) or opt for Edelweiss expert portfolio management service.
  • ULIP taxation benefits as eligible under the Income Tax Act, 1961. 

 

Conclusion

Investing in the best ULIP like the ULIP plan of Edelweiss Tokio can provide a much-need boost to your savings. With double benefits of insurance and investment, along with economical premiums, better returns and flexible features, ULIPs are the perfect choice to safeguard your and your family’s future.

 

Swati Tumar - Travel & Finance Writer

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.

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