How Much Wealth Can You Create from ULIP in 10 years?
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How Much Wealth Can You Create from ULIP in 10 years?

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  • 7th Feb 2022
  • 678

How Much Wealth Can You Create from ULIP in 10 years?

Summary:

ULIPs have provided an average return of 10%-12% p.a. in the past. Going by the past records, you can expect a moderately high return from these investments. Keep reading to know more.

Content:

The benefits of a ULIP are not restricted to high returns. In addition to this, you can enjoy a life cover, tax exemptions and many more. Here are the major benefits of a ULIP.

Benefits of Investing in ULIPs

1.Dual Advantage

Investing in ULIPs gives you the dual advantage of a life cover and investment returns.

a) Life Cover:

Usually, the life cover provided is 10 times the annual premium. This amount is payable to the nominee in case of the policyholder’s demise during the policy term.

b)High Returns:

The major portion of the premium is invested, primarily in equity markets. This helps in generating higher returns. Historically, ULIPs have grown at 10%-12% p.a. on an average.

2.Tax Benefits:

a) Premium:

The amount paid by you as a premium is exempt from tax up to Rs. 1.50 lakhs per year.

b)Maturity Value:

  • The maturity value of ULIPs purchased before 1st February 2021, is exempt from tax under Section 10(10D) of the of the Income Tax Act, 1961.
  • The maturity value of ULIPs purchased after 1st February 2021, attracts 10% LTCG tax if the gains are above Rs. 1 lakh.

3. Flexibility to Switch Funds

Since the returns of a ULIP are linked to the market, most ULIPs provide free fund switch options. As a result, you can change your exposure according to the market movements and your requirements.

4. Long-Term Investments

A lock-in period of 5 years is applicable on ULIP investments. Hence, by default, ULIPs are for the long term. In fact, experts advise that an investment period of 10-20 years is ideal for ULIPs.

What are the Charges for ULIP Investment?

Generally, you will find 6 types of charges associated with ULIPs.

1.Premium Allocation Charges

The initial expenses incurred by the insurance company for underwriting, documentation, policy issuing, etc. This amount is charged upfront from the first premium. On average, the charges are approx. 1.5%-4% of the premium.

2.Mortality charges

In order to provide the life cover, ULIPs deduct a mortality charge from the premiums paid by you. Usually, this charge is calculated on every Rs. 1,000 of the life covers. This depends on your age, health risk and the mortality table.

3. Fund Management Charges

As per the IRDAI, ULIPs cannot charge more than 1.50% of the fund value towards the fund management charges. This includes the salary of experts and other professionals who manage your investment.

4.Policy Administration Charges

A monthly charge is levied on your account for administration purposes, like record-keeping, paperwork etc. For this purpose, the proportionate units are sold. The amount can either be fixed or variable as per the insurer’s policy.

5.Surrender Charges

A surrender charge is levied, if you surrender your policy within the lock-in period of 5 years.

Switch Charges

The insurer provides some free fund switches within a specified time fram. If your switches exceed this, you may be charged a pre-defined amount.

Example: Wealth creation from ULIP in 10 Years

Assuming the expected rate of return to be 10% (after charging all the expenses) and you pay a premium of Rs. 60,000 annually, your final corpus can look like this,

Date

Opening Investment

Invested Premium

Returns

Closing Investment

1-Jan-21

₹ -

₹ 60,000.00

₹ 6,000.00

₹ 66,000.00

1-Jan-22

₹ 66,000.00

₹ 60,000.00

₹ 12,600.00

₹ 138,600.00

1-Jan-23

₹ 138,600.00

₹ 60,000.00

₹ 19,860.00

₹ 218,460.00

1-Jan-24

₹ 218,460.00

₹ 60,000.00

₹ 27,846.00

₹ 306,306.00

1-Jan-25

₹ 306,306.00

₹ 60,000.00

₹ 36,630.60

₹ 402,936.60

1-Jan-26

₹ 402,936.60

₹ 60,000.00

₹ 46,293.66

₹ 509,230.26

1-Jan-27

₹ 509,230.26

₹ 60,000.00

₹ 56,923.03

₹ 626,153.29

1-Jan-28

₹ 626,153.29

₹ 60,000.00

₹ 68,615.33

₹ 754,768.61

1-Jan-29

₹ 754,768.61

₹ 60,000.00

₹ 81,476.86

₹ 896,245.48

1-Jan-30

₹ 896,245.48

₹ 60,000.00

₹ 95,624.55

₹ 1,051,870.02

The frequency of compounding is a determining factor to calculate the returns. If you pay a monthly premium of Rs. 5,000 instead, your final corpus will be ₹ 1,204,255/-.

- A Consumer Education Initiative series by Kotak Life

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