Paying Rs 50,000 a year towards an insurance policy may seem like a straightforward expense. However, if you have opted for a Unit Linked Insurance Plan (ULIP), your premium serves two purposes — providing life insurance cover and building an investment corpus.
A ULIP combines life insurance with market-linked investment. The premium is allocated towards the investment component after applicable charges, while a portion is used towards the cost of insurance and other policy expenses.
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This means that when you are paying an annual premium of Rs 50,000, the entire amount does not get invested in the market.
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What Is A ULIP?
A Unit Linked Insurance Plan (ULIP) are life insurance cum investment instruments that provides the dual benefit of life cover along with wealth creation. Suitable for investors with different risk appetites, this policy combines life insurance cover with market-linked investment. Unlike a traditional term insurance policy, where the premium primarily pays for life cover, a ULIP allows policyholders to invest a portion of the premium in funds linked to equity, debt or a combination of both.
The investment value can rise or fall depending on the performance of the underlying funds. Therefore, the amount invested and the eventual value of the policy are not necessarily the same.
Where Does Your Rs 50,000 Premium Go?
ULIPs can have multiple charges, including insurance-related mortality charges, policy administration charges, fund management charges and other applicable costs. These charges can reduce the amount that actually gets allocated towards investment and, consequently, affect the value of the corpus over the long term.
On paper, a ULIP may appear to allow you to invest a significant amount while also getting life insurance. However, the insurance and administrative costs can reduce the amount available for investment compared with a regular market-linked investment where such insurance-related costs are not deducted from the investment.
For illustration, assume a person starts a ULIP at the age of 18. Let's assume a mortality charge of Rs 2,000-5,000 a year for this calculation.
If the annual premium is Rs 50,000, and Rs 5,000 is assumed to go towards the mortality charge, around Rs 45,000 would remain before considering other applicable charges.
Rs 45,000 A Year Invested At 12%
Assume the ULIP premium is paid for five years and Rs 45,000 is invested every year. This means the total amount invested over five years would be: Rs 45,000 × 5 = Rs 2.25 lakh
Now, assume the entire investment is allocated to equity funds and earns an average annual return of 12%.
If Rs 45,000 is invested at the end of each year for five years, the investment could grow to approximately Rs 2.86 lakh at the end of the fifth year.
This means the estimated gain would be around Rs 60,878, taking the total value to approximately Rs 2.86 lakh.
How Much Life Cover Does A ULIP Provide?
The life cover offered by a ULIP depends on the policy. According to Tata AIG, the life cover offered by a ULIP is usually a minimum of 10 times the annual premium, although it can go up to as much as 40 times the annual premium, depending on the policy.
For example, if the annual premium is Rs 50,000 and the policy provides life cover equal to 10 times the annual premium, the sum assured would be Rs 5 lakh.
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If the policy provides a cover of 40 times the annual premium, the sum assured would be Rs 20 lakh. The actual cover, however, should always be checked in the specific policy document.
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