You were told that the growth of the market value of your ULIP plan was 15%. But your money hardly grew by 8%. Why?
Do ULIPs never give returns at market value?
What is ULIP?

ULIP stands for "Unit Linked Insurance Plan"

These are insurance plans that will also invest your money into the market, so that you get insurance cover, while also giving you returns at the time of maturity of the plans. While this plan offers you a very good option of getting returns at the time of maturity, there are a lot of downsides that are being hidden from you, and what is kept hidden from you is a lot of detail that once you get to know, you will probably NEVER really opt for an ULIP plan.

After 10 years of experience in the software industry, out of which more than 8 years is into development of Insurance Software, I am confident enough to share those details, which at times even agents are unaware of - just because 'The system does it for them' - the system that was developed by a lot of people like me working together.

The ULIP Basics - Internal calculations

You are only aware of the premium that you pay, be it monthly, quarterly, semi-annual, annual, one-time, whatever be the frequency. You might expect that when you are told the fund rises by 15% in one year, your premium amount would be increased straight by 15%.

However, that is not the case. What increases by 15% is the amount that goes into the fund, and that amount rises by 15%. The amount that goes into the fund is way less than what you pay as your premium.

Why?

Simply put, because the company doesn't do it for you for free. In fact, it shells out a lot of money from you to do the task. Also note that you are also given an insurance benefit for a ULIP plan. That is not free either. So basically, your amount is divided into (at least) the following components. There may be more compoenents based on your plan. The common components are:

  • Fees and Charges
  • Commissions
  • Actual Premium of your Insurance Cover
  • Premium of any riders taken for your insurance plan
  • Others
  • Allocated to Funds

Fees and Charges

The insurance company levys its own fees and charges for the services it provides. For example, since your amount is going into funds, it will apply a 'Fund allocation charge' on your premium. This is usually a small percentage of the amount that goes into the funds, and is similar to the charges applied when you invest in the market.

It might also apply a percentage of charge for the service it provides you in investing your amount into various funds, or providing you insurance, etc.

The percentage of charges it applies varies from product to product, and is not known to the customer (i.e. you). Most of the times, even the agents are unaware of how much these charges are for a product.

Commissions

Commission is the amount that is directly paid to the broker for getting a new client to the company. Again, commissions differ from product to product. Some products may have no commission, while some others might even have 100% of the first premium as commission in the worst case. This means, that all of your first premium is going directly to the agent as his commission, and none is invested into any funds. The actual investment starts from your second year premium. Most commissions are paid in the first or the second policy year, max the third. That is the reason why you cannot really cancel the policy in the first three years, and you will not get any money in return if you do so in the first three years. Note that this percentage is calculated after the insurance premium deduction explained in the upcoming points.

Actual Premium of the Insurance cover

Of course your insurance does not come free. The premium of your insurance cover is directly deducted from your total premium you pay. It is as good as you keeping aside that amount and buying an insurance policy. However, you as a client, is unware of this happening at the company's end.

Premium of any Insurance riders

A rider is any additional cover you take along with your insurance plan. For example, you might opt for double sum insured for the case of Accidental death. These riders come with its own additional premiums, and is deducted from the premium amount you pay annually.

Others

There are more deductions and they totally depend on what product you have opted. Note that Insurance companies will market those products more that are giving them more profits.

Allocated to funds

Finally after all these deductions, the leftover money is allocated to your funds. This is the amount that will grow as per the market rate, and not the premium that you paid.

So is a ULIP benefitial?

If you have to directly ask this question straight, the answer is NO. ULIP is never benefitial. If you yourself have to buy 2 separate plans, one as your insurance plan, and the other as your investment plan, You end up getting a higher maturity amount, and also a greater insurance value.

However, we can consider this as a case that we take additional services from a company and pay the company for their services. However, in my opinion, and also to the opinion of most of the financial experts, it is always recommended to not go for a ULIP plan but instead cover yourself with a term plan, and you have a lot of options to invest your money, from your FDs, Mutual Funds, Share markets, bonds, etc.