Yes, your age at the time of purchase affects the return that you earn in investment and insurance combo products such as traditional life insurance plans and ULIPs.
Everything else being same, lower the age at the time of purchase, better will be your returns.
It is best to understand this with the help of examples. Let’s first start with a traditional plan.
How your age affects returns in traditional plans?
Let’s consider a traditional life insurance plan to see the effect.
LIC New Jeevan Anand is a non-linked participating life insurance plan.
Simple reversionary bonus is linked to Sum Assured and is announced at the end of each year. Remember the bonus is paid at the time of policy maturity only.
In addition, the policyholder will get Final Additional Bonus (FAB) at the time of maturity. Only FAB announced in the year of maturity will be applicable to your policy.
At maturity, you get Sum Assured + Vested Simple Reversionary Bonuses + Final Additional Bonus
You can see both the bonuses are linked to Sum Assured.
Therefore, if Amit (30) and Rahul (50) purchase LIC New Jeevan Anand for a Sum Assured of Rs 10 lacs on the same day, both will end up with the same maturity corpus.
However, they will pay different annual premiums and this will affect returns.
Let’s assume both of them purchase the plan for 20 years with Sum Assured of Rs 10 lacs.
The premium for Amit (30) will be Rs 58,362 in the first year and Rs 57,105 for the subsequent years.
The premium for Rahul (50) will be Rs 72,085 in the first year and Rs 70,533 for the subsequent years.
Let’s further assume LIC announces a reversionary bonus of Rs 45 (per thousand of Sum Assured) for the next 20 years. Additionally, it announces a FAB of Rs 500 (per thousand of Sum Assured) in the year of maturity.
Reversionary Bonus per year will be Rs 10 lac/1,000 X 45 = Rs 45,000
FAB in the year of maturity will be Rs 10 lacs/1,000 X 500 = Rs 5 lacs
Maturity corpus = Rs 10 lacs (Sum Assured) +
Rs 9 lacs (Rs 45,000 X 20)+
Rs 5 lacs (FAB) = Rs 24 lacs
Both end up with Rs 24 lacs at maturity.
Amit earns a return of 6.62% p.a.
On the other hand, since Rahul pays a much higher premium for the same maturity value, he ends up with 4.81% p.a.
The effect of age at the time of purchase of policy affects the return.
Quite clearly, if you purchase at a higher age, the already low returns of traditional plans become even lower.
Does this happen with ULIPs too?
Yes, you can expect this in ULIPs too.
ULIPs work in a slightly different fashion as compared to traditional plan.
In case of traditional plans, your annual premium itself is a function of age and Sum Assured. The function is a black-box and I don’t how it works.
In case of ULIPs, you are asked to choose premium that you can pay. Sum Assured is a multiple of the annual premium. Let’s say 10 times. So, if you agree to pay an annual premium of Rs 1 lac, the Sum Assured will be Rs 10 lacs. You can see age is nowhere part of the equation in this case.
However, in case of ULIPs, your units are periodically sold off to recover mortality charges. These mortality charges go towards providing you the life cover.
Clearly, mortality charges increase with age (similar to how term life insurance premium increases with age).
Therefore, more and more units have to be redeemed to provide those mortality charges.
For instance, Amit purchases a ULIP at the age of 30 and Rahul aged 50 purchases the same ULIP (and chooses the same fund) on the same date. The annual premium and Sum Assured are also same.
Amit will end up with much larger corpus than Rahul at the time of maturity(say after 15 years).
This is because Amit would have paid lesser mortality charges. For Rahul, greater number of units would have to be redeemed to provide for the charges.
Amit will end up with greater number of units than Rahul (even though NAV of the fund unit will be same) and with a larger corpus than Rahul.
With ULIP, Fund NAV may not be indicative of your returns
This brings me to a slightly unrelated but an important discussion.
Many times, during sales presentation of ULIPs, salesperson points to the growth in NAV to show how your corpus would have grown with a particular ULIP. That past returns do not guarantee future returns is another matter altogether.
However, even if the past were to repeat itself, you will not earn the same return as shown in the illustration.
This is because some of your units will have to be redeemed to recover various charges including mortality charges. FMC (perhaps) etc.
Just to give an example, suppose you get 1000 units of Rs 100 each when you invest in the plan. At the end of 5 years, the NAV has grown from Rs 100 to Rs 200. That’s a return of 14% p.a.
However, if the number of units goes down to say 900 (100 units used to square off various charges), your return is only 12.4% p.a. (Rs 1 lac has grown to 900X200= 1.8 lacs).
Even though the NAV of your fund has doubled, your investment has not doubled.
Many times, I have talked about high charges, lack of flexibility, difficulty in exit and lack of portability to build a case against insurance-cum-investment plans such as traditional life insurance plans and ULIPs.
However, discussion about how age affects returns deserves merit too. Clearly, the impact is higher for an older person. This is an aspect many salespersons conveniently ignore or don’ know.
Elderly persons or retired persons make for easy targets to sell these kinds of plans. For such people, these plans are a double blow.
Firstly, they may not need life cover and hence there is no point paying for life cover. Secondly, there is no point paying so heavily for the life coverage. This dampens your returns.
Remember, NAV is not affected. Only the number of units that you own goes down.
Another point to note is that if you have an existing illness (at an old age, you are likely to have an illness), your mortality charges may even get loaded (increased due to illness). This will dampen your returns further.
Here is an egregious example where an investor ended up with Rs 11,000 after investing Rs 3.2 lacs over 6 years in a ULIP.
If you keep insurance and investment separate, you wouldn’t face this issue.
Keep things simple.