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Understanding ULIP Returns in 5 Years
May 20, 2025
Table of Content
In this policy, the investment risks in the investment portfolio is borne by the policyholder
Unit-Linked Insurance Plans (ULIPs) are a popular investment option among Indians looking for insurance and investment benefits under a single policy. ULIPs have evolved over time and now offer different investment horizons to suit the needs of various investors. One such investment horizon is a 5-year ULIP policy. Let's better understand how a ULIP investment for 5 years can help you meet your financial goals.
What Is a 5-Year ULIP Policy?
A 5-year ULIP policy is a type of insurance policy that offers life coverage and investment benefits for a limited period of five years. At the end of the tenure, the policyholder receives a lump sum payment of the sum assured and investment returns. The sum assured is the minimum amount the policyholder is guaranteed to receive on maturity.
How Does a 5-Year ULIP Policy Work?
A 5-year ULIP (Unit Linked Insurance Plan) is an insurance product linked to the capital markets with an initial lock-in period of five years, after which you can withdraw funds. A portion of the premiums you pay towards the 5-year investment in ULIPs goes into life cover, and part of it is invested into equity, debt or hybrid funds, depending on your choice. The fund choice, applicable charges, and market trend influence the ULIP returns in 5 years.
Let us take the case of Ramesh, a 30-year-old individual working in an IT company. Ramesh bought a ULIP, where he paid an annual premium of ₹50,000 for 5 years, as a starting point for his child insurance plan to save for his son’s education. He selected a balanced fund because it is less risky.
After 5 years: At the end of the fifth year, considering the market conditions and deducting the applicable charges, the fund value was ₹3,20,000. Besides the yield, his family is safeguarded against a financial crisis in his absence. Please note that these values are used just for illustrative purpose and actual return may vary
Why Choose a 5-Year ULIP Policy?
Opting for a 5-year ULIP offers many benefits. Here's why you should consider purchasing a plan:
Short-Term Investment Horizon
A 5-year ULIP policy is a great investment option for investors with a short-term investment horizon. If you want to invest your money for a short period, a 5-year ULIP policy can be a good option.
Flexibility
A 5-year ULIP policy offers a lot of flexibility to investors. The policyholder can choose the premium amount and the investment funds. Additionally, they can make fund switches during the policy term.
Tax Benefits
The premiums paid towards a 5-year ULIP policy are eligible for tax benefits under Section 80C# of the Income Tax Act, 1961.
Proceeds received on surrender/partial withdrawal/maturity of ULIP plan are exempt from tax subject to provisions mentioned in Section 10(10D)# i.e if the premium payable for any of the years during the policy term does not exceed 10% of the death sum assured.
In addition to the above, for policies issued after 1st Feb 2021 tax exemption on maturity proceeds will be available if premium paid in any of the years towards such matured polices does not exceed INR 2,50,000. Out of the total matured policies in a financial year, exemption u/s 10(10D) will be available only towards those polices whose aggregate premium in any years does not exceed INR 2,50,000/.
Income from rest of the policies exceeding the mentioned limit will be chargeable as capital gains.
The death benefit sum assured paid to beneficiaries is tax-exempt.
Life Coverage
A 5-year ULIP policy also offers life insurance benefits to the policyholder. In the event of the policyholder's demise during the policy term, the nominee receives the sum assured.
How Are 5-Year ULIP Return Rates Calculated?
The 5-Year ULIP investment growth are relative to funds infused and the market performance. Hence, the returns are not guaranteed and keep fluctuating. Here is a glimpse of the ULIP return calculation.
ULIP Fund Investment
When you invest in a ULIP, your premium is divided into two parts, one that goes towards a life insurance cover and the second part that is invested into market-linked funds of your choice, such as equity, debt or hybrid assets, depending on the risk tolerance level. The returns on these funds impact the value of your investment.
Net Asset Value (NAV)
NAV represents the per-unit value of the fund and is important in calculating how much your investment will earn.
NAV Formula
The NAV of the fund is computed daily and represents the fund's market price.
NAV = (Total Assets- Total Liabilities)/Total Outstanding Units
If the Net Asset Value of your fund increases, the returns also increase and vice versa.
5-Year Return
You can use the CAGR method to calculate the 5-year returns.
CAGR = {[(Current value/Initial Value) ^ (1/number of years)]-1} x 100. Current value is the value of the units on maturity, i.e., after 5 years, and the initial value is the value of the units at the time of purchase.
ULIP Flexibility
One of the benefits of ULIPs is the liberty to switch between funds during the policy term. You can invest in equity or debt funds or both, depending on your risk appetite and market volatility. Flexibility in choosing the investment funds and premiums is an added advantage.
Key Factors Affecting ULIP Returns in 5 Years
The ULIP returns in 5 years depend on the factors mentioned below:
Market Fluctuations
Since ULIPs are market-linked instruments, the 5-year ULIP performance depends on market conditions. A strong market increases returns, and a poorly performing market reduces the returns.
Choosing the Right Funds
It’s crucial to choose the right combination of funds to align with your financial objectives and risk tolerance levels. Those with the advantage of time may opt for more equity-heavy portfolios, as younger investors, but people who are conservative in their approach may want to go for debt or balanced funds for stability.
Charges That Impact Returns
The charges that impact the ULIP returns include premium allocation fees, fund management expenses, policy administration costs, and mortality charges. These charges are collected before your money is invested in selected funds. Exorbitant charges reduce the overall returns. It is recommended to invest in ULIPs with affordable fees for better growth.
FAQs on ULIP returns in 5 years
Q. Can I withdraw my ULIP investment before 5 years?
No, there is a lock-in period of five years for ULIPs. You cannot make a partial withdrawal or a full withdrawal before this time. After five years, you can choose to withdraw the fund value or continue investing.
Q. What happens to my ULIP investment after 5 years?
After the 5-year lock-in period, you can choose to withdraw the entire amount or make partial withdrawals and allow the residual amount to reap the benefits of compounding over an extended period. This flexibility allows you to align your ULIP investments with both short-term as well as long-term goals.
Q. Are ULIP returns guaranteed in 5 years?
No, ULIP returns are not assured. They depend on the performance of the market. Though some insurers provide ULIPs with minimum return guarantees, there is less scope to earn returns commensurate with market-linked assets.
Q. What is the typical range of ULIP returns over 5 years?
Returns vary based on fund choice and market conditions. Historically, equity-based ULIPs have delivered 8%–12% annualised returns over five years, while debt-based ULIPs tend to yield 4%–6%.
Q. Can I expect high returns from a 5-year ULIP?
Yes. You can expect high returns from a 5-year ULIP depending on your fund choice. Equity-linked ULIP investments fetch high returns when market performance is high. However, the returns are not steady and it is recommended to assess your financial goals and risk tolerance levels before making the decision.
Related Article
- Know When is the Right Time to Switch Your ULIP Fund
- Mortality Charges in ULIPs - How Are They Calculated?
- Check Details on Loan Against ULIP Policy
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
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