Unit Linked Insurance Plans (ULIPs) are financial instruments that combine life insurance with investment to give the dual benefit of protection and wealth creation. The returns from this systematic investment can help achieve long-term goals like buying your own house, your child’s education, retirement planning and more.

While paying premiums for ULIPs, a portion of it is used for providing life coverage^` whereas, the other portion is invested in funds. You also have the option to choose your own investment mix based on the returns expected and your risk appetite. Once the investment period is completed, you receive an amount known as the fund value as returns. This amount received will depend on the NAV of the units initially invested.

What is NAV?

Net Asset Value (NAV) is the per-unit value of the assets minus the value of the liabilities of an investment fund. This value helps you track your fund’s performance. Understanding NAV requires a basic idea of how ULIPs work.

Like you, several other investors also pay the premium for a ULIP to the insurance provider. The insurer then collects the money from all such investors to create one large investment amount which is invested in a variety of market instruments. Large and diverse investments help ensure good returns.

Each investor gets a specific number of units based on the premium they pay. The value of each unit is called Net Asset Value or NAV. The number of units each investor has, represents their share in the single invested amount. The profits are then split according to the number of units they have.

How is ULIP NAV calculated?

NAVs are calculated on each business day based on the following formula:

{(Market value of the investment held by the fund + Value of current assets) – (Value of current liabilities and provisions, if any)} / Number of units existing on the valuation date

The liabilities and provisions include costs related to managing the fund.

The following example illustrates the calculation:

Suppose you pay a premium of ₹ 70,000 and buy a ULIP.

Another investor contributes ₹ 30,000.

After deducting basic costs like mortality charges, let’s assume your investment amount becomes ₹ 69,500. Likewise, the other investor’s input becomes ₹ 29,600

Thus, the total amount the insurance company can invest in market funds is ₹ (69,500 + 29,600) = ₹ 99,100. This sum is the net market value of the invested fund.

Now, the insurer creates units each with a face value of ₹ 10.

Hence, the total number of units = 99,100/ 10 = 9,910 units

Based on this face value, you will hold 69,500/ 10 = 6,950 units. This is because your contribution was ₹ 69,500.

If the investment brings profits, the net investment value will increase. Say, the fund’s net value rises to ₹ 1, 20,000. As a result, the NAV also changes. But the number of units remains the same until you purchase new units by paying the next premium instalment.

The new NAV can be determined by dividing the new net fund value (i.e., ₹ 1,20,000) by the number of units existing in the fund (9,910 in this case).

Thus, the new value of each unit in the fund is now ₹ 1,20,000/ 9,910 = ₹ 12.11

And the net worth of all your units is now 6,950 X ₹ 12.11 = ₹ 84164.50. Therefore, you have made a profit of ₹ 14,664

Conclusion

With ULIPs, you can control your returns by switching your money among different asset types, like equities, debt funds, or a combination of both equity and debt. When the market is down, you can switch to debt funds and protect your funds. When the market recovers, you can shift to equities and enjoy the benefits of higher returns.

ULIPs minimise investment risks and help you generate substantial profits in the long run. Thus, when you plan for resources to finance your life goals, you should consider including ULIPs in your portfolio.