ULIPs can give you a good return over the long run. So, it’s beneficial to you if you hold on to ULIPs till their maturities as it gives you back regarding wealth creation and optimisation of returns.
Since ULIPs are structured to give you the dual benefit of insurance and investment. This investment product primarily focuses on giving you a life coverage and financial security based on your current life needs.
Significant Impact of Charges
Being a hybrid product, a ULIP involves various types of charges like premium allocation charges, fund management fees, mortality charges, surrender charges, etc. These charges get averaged if you stay on course till the plan’s term completion.
As ULIPs are market-linked products, it takes many market cycles to recover the various charges and get the potential return on investment. Your return for initial years is eaten away by the costs.
Mid-way Surrender Right After the Lock-in Period
In any investment product, an early exit will have its consequences. Many people buy ULIPs just as a tax-saving investment instrument without actually understanding the suitability and the need for a durable product.
Earlier, the lock-in period in ULIP was three years. This allowed investors to pay the premium for the just the first three years and then leave it at that. Often, this was wrongly perceived by insurance-seekers as a short-term product. Most chose to exit post the lock-in period to yield benefits.
Now that the IRDAI has changed the lock-in period requirement to 5 years, it’s giving a sense of necessity to invest for long terms in ULIPs.
Let’s look at the performance of some top ULIPs with aggressive (more equity) allocation.
Aggressive Allocation (As on 29/05/2017) | |||||
ULIP Name | Return | ||||
1 Yr | 2 Yrs | 3 Yrs | 5 Yrs | 10 Yrs | |
| ICICI Prudential Life – Group Growth Fund | 14.65% | 8.00% | 11.83% | 14.30% | 11.64% |
| Tata AIA Life – Whole Life Aggressive Growth Fund | 20.46% | 11.53% | 14.64% | 16.11% | 10.71% |
| ICICI Prudential Life – Flexi Balanced Fund II | 15.88% | 8.89% | 13.42% | 14.92% | 10.43% |
| ICICI Prudential Life – Pension Flexi Balanced Fund II | 15.18% | 8.52% | 13.09% | 14.20% | 10.17% |
| Kotak Mahindra Old Mutual Life – Kotak Group Balanced Fund | 16.05% | 10.06% | 13.87% | 14.84% | 10.04% |
| Max Life – Group Gratuity Growth Fund | 17.91% | 9.88% | 12.14% | 13.67% | 9.89% |
| LIC of India – Future Plus Growth | 15.93% | 9.36% | 8.78% | 12.26% | 9.78% |
| Kotak Mahindra Old Mutual Life – Kotak Dynamic Balanced Fund | 15.35% | 9.60% | 13.37% | 14.46% | 9.75% |
| LIC of India – Jeevan Plus Growth | 15.23% | 5.92% | 7.90% | 11.44% | 9.67% |
| SBI Life – Growth Pension Fund | 18.08% | 9.92% | 12.93% | 14.90% | 9.66% |
Returns for the first five years may look impressive in the above table. But, your actual return will be much lower than the gross return shown above, as this aspect gets impacted by the various charges during first few years. As part of the premium is eaten away by charges, your actual return on allocated funds will be lesser for a shorter term like 5 years.
If you stay invested for long periods like 10 years or more, the initial charges will spread over the years. Thus, your investment will end up with a reasonable return. This is especially true if you have chosen to invest in large cap equity funds, as you could get more satisfactory returns over the long run.
Let’s look at the performance of ULIPs with large-cap funds:
Large-Cap (As on 29/05/2017) | |||
ULIP Name | Return | ||
3 Yrs | 5 Yrs | 10 Yrs | |
| Bajaj Allianz Life – Pure Stock Fund | 18.13% | 20.26% | 15.75% |
| Bajaj Allianz Life – Pure Equity Fund | 18.15% | 19.64% | 15.43% |
| Bajaj Allianz Life – Equity Plus Pension | 14.74% | 17.72% | 13.57% |
| Bajaj Allianz Life – Equity Growth Pension Fund | 14.89% | 17.89% | 12.20% |
| Bajaj Allianz Life – Premier Equity Gain Fund | 13.92% | 16.76% | 12.03% |
| Max Life – Growth Super Fund | 11.90% | 15.13% | 11.56% |
| ICICI Prudential Life – Pension Flexi Growth Fund II | 17.45% | 19.11% | 11.48% |
| Bajaj Allianz Life – Equity Plus Fund | 14.93% | 17.73% | 11.43% |
| HDFC Standard Life – Equity Managed Investment Pension | 14.54% | 16.82% | 11.26% |
| ICICI Prudential Life – Maximiser Fund II | 12.41% | 16.91% | 11.23% |
ULIPs are Long-term
ULIPs are structured to meet long-term goals, such as your children’ education, your retirement corpus, etc. If you make a mid-way exit, the whole purpose of the investment is lost. It will impact your financial planning. If you feel the market is up when you are in the 5th or 6th year of your policy term, you don’t need to make an exit to book the returns. ULIPs provide you with the flexibility to make switches to deal with the market’s ups and downs.
On the other hand, if you do realise that a ULIP is not suitable to your investment needs mid-way of the term, it’s not wise to make an irrational exit. Short-term exits can prove to be expensive.
Bottom Line
After the rationalisation of the ULIP charge structure, even if you still stand to lose on ULIPs, then it’s just because you are not sticking to a policy term. Any insurance product, even if it’s market-linked, can give reasonable returns over the long run of at least more than 10 years. Hence, once you are committed, stay until the end of your policy term to get the promising benefits out of it. ULIPs are surely not the best bet for your short-term or medium-term investment objectives.