What Is a 5-Year ULIP Policy?
A 5-year ULIP policy is a type of life insurance that invests your money in funds like equity, debt, or a combination of both. ULIP stands for Unit Linked Insurance Plan. The word “unit-linked” means your money is linked to funds in the market. This plan has a minimum lock-in period of 5 years. After which, partial withdrawals can be made.
The main objective of this policy is to offer the benefit of life cover and the chance to grow your invested money during the policy term with market fluctuations. A part of your premium goes towards the insurance cover, and the remaining amount is invested in the funds you choose.
Due to the 5-year lock-in period, it's crucial to stay invested until the end to fully benefit from the policy's performance.
How Does a 5-Year ULIP Policy Work?
Understanding how a 5-year ULIP policy works is easy. When you buy this plan, you pay a premium either monthly, quarterly, or yearly. A small part of this premium provides life cover. The rest is used to buy units in funds like equity or debt, based on your risk tolerance.
Here’s what happens step-by-step:
Premium Payment
You pay a fixed amount regularly. This premium is split into two parts: one for insurance and the other for fund allocation.
Fund Choice
You get to choose the type of fund.
○ Equity funds carry more risk but may give higher growth.
○ Debt funds are safer and offer steady returns.
○ Balanced funds offer a mix of both.
Fund Management
Experts manage your money to help it grow. You can also switch funds if needed, based on market conditions or your risk level.
Lock-in Period
This plan has a 5-year lock-in. You cannot take out your money during this time. After that, you can withdraw the fund value, stay invested, or make partial withdrawals.
Maturity or Death Benefit
In an unfortunate incident of death of the life insured during the policy term, the nominee will receive the higher of the sum assured or fund value. Specific terms and conditions can differ based on the particular plan.
Why Choose a 5-Year ULIP Policy?
A 5-year ULIP policy offers multiple benefits. It is not just a life insurance plan, but also a simple way to plan short-term financial goals. Let’s look at why this option is useful:
1. Short-Term Investment Horizon
Not everyone wants to commit to a plan for 10-20 years. A 5-year ULIP helps you with the opportunity to grow your money in a shorter time. It is ideal for goals like buying a vehicle, taking a short trip, or building a small emergency fund.
2. Life Insurance Cover
This plan provides insurance coverage, which means your family is financially protected. In case of occurrence of the death of the insured person, the sum assured or the fund value, whichever is higher, is given to your nominee. However, specific terms and conditions can differ based on the insurer and the particular plan.
3. Market-Linked Growth
You have the chance to earn better returns than traditional options. Your premium is used to buy market-linked funds that can grow based on market performance.
4. Flexibility
You can switch between funds anytime during the policy term basis the policy terms and conditions. If the market fluctuates or your risk tolerance level changes, you can adjust your investments easily.
5. Tax Benefits
The premium paid under the policy is eligible for tax deductions under Section 80C of the Income Tax Act under the old tax regime.
6. Savings Habit
The 5-year lock-in helps build the habit of saving regularly. This can be useful in developing financial discipline.
7. Ease of Management
Fund managers take care of your investments. You don’t need to track the market every day. You can also use tools like a ULIP calculator to check how your money might grow.
How Are 5-Year ULIP Return Rates Calculated?
When people look for ULIP returns in 5 years, they want to estimate the potential returns they might get at the end of the policy term. There are two primary methods to calculate the return:
1. Absolute Return
If you wish to calculate the absolute returns on ULIP, you will need the current NAV and the initial NAV of the scheme. This method can be used to figure out the ULIP performance if it is held for a short period of time.
Absolute Returns = [(Current NAV – Initial NAV)/Initial NAV]*100
Example:
If your ULIP NAV was ₹100 at the beginning of the policy and now it is ₹120, then
[(120 - 100) / 100] * 100 = 20% return
2. CAGR (Compound Annual Growth Rate)
Compounded Annual Growth Rate (CAGR): This is the measure of the annual growth of an investment over a specific period of time. Here is the formula for the same:
CAGR = {[(Current NAV/Initial NAV)^(1/Number of Years)] – 1}*100
Example:
If NAV grew from ₹100 to ₹135 in 5 years, CAGR = approx. 6.2%
The returns vary depending on your fund selection, market conditions, charges, and how long you stay invested in the plan.
Conclusion
A 5-year ULIP policy can help you plan for short-term goals while providing life cover. It is a useful plan if you want flexibility, easy management, and the potential for better growth. The ULIP returns in 5 years depend on your fund type chosen, charges, and the duration you stay invested.
This plan suits those who want to help grow their money over five years while also needing life insurance. Whether it’s saving for a goal or building a cushion, a ULIP may help you take that step—slowly, safely, and smartly.
FAQs
What is the average return of ULIP?
Average ULIP returns vary based on the type of fund. Equity ULIPs may offer higher returns than debt ULIPs. Historically, long-term equity ULIPs have been estimated to yield average returns of around 8% to 10%. Please note that these returns are not guaranteed and these returns depend on market performance.
Is ULIP good for 5 years?
A 5-year ULIP can be good for achieving short-term goals and providing basic life cover. It gives you flexibility and the chance to grow your money based on market performance.
What is the return of ULIP for 10 years?
ULIPs held for 10 years may provide higher returns compared to 5-year plans. Over 10 years, the market performance tends to balance out short-term fluctuations, potentially yielding around 8% to 10% returns annually, depending on your fund choice and market conditions.
Is ULIP better than FD?
ULIP and Fixed Deposits serve different purposes. ULIPs offer life cover and market-linked returns, while FDs offer fixed interest. It is better to assess your financial goals before making any decision.
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