Highest NAV Concepts - Practical example

Every insurance company launches their new guarantee highest NAV ulip policy in the market. People will opt for these ulip policies without checking details of the hidden condition.Let me explain these concepts with real life example.
Let’s think practical: If insurance company has 10 policy holders with Rs 1000 annual premium. Each policy holder has 100 Units (with initial NAV Rs 10 and assuming no ulip charges are deducted).The company has total 1000 Units (100 Units per customer and total 10 customers).If we consider fund performance as shown in following table.


Guarantee Highest NAV Policy Comparison

Year

Guarantee Highest NAV policy

Reality-Returns(Appx.8%) in debt fund

Closing NAV in Each Year

NAV*Units(1000)

Closing NAV in Each Year

NAV*Units(1000)

1

10

10,000

10.80

10800

2

15

15,000

11.60

11600

3

25

25,000

12.40

12400

4

20

20,000

13.20

13200

5

17

17,000

14.00

14000

6

15

15,000

14.80

14800

7

16

16,000

15.60

15600

8

15

15,000

16.60

16600


Total fund corpus after 8th Year=15,000

Total fund corpus after 8th Year=16,600
If all 10 policy holders want to redeem their units at the end of 8th year and the highest NAV is Rs 25 then the insurance company should have Rs 25,000 in their corpus to satisfy the redemption requests of the policy holder. But, as shown in the table, Market is not good condition right now and current NAV is Rs 15 then how will this insurance company with manage to give Rs 25,000 to their policy holders.

Nobody can guarantee returns in pure equity fund and everybody can guarantee returns in pure debt fund. So, these insurance companies are advertising on the basis of ULIP equity funds but they will be investing more than 95% fund value in debt fund for sure.

If any insurance company is giving guarantee highest NAV for pure equity fund then I will take a bank loan and invest all money in this fund. because I know market will definitely give good returns at least once in 7 or 8 years as given in past too.

In Summary, Please understand these hidden conditions and take a wise decision to invest money better to get better return.