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How Capital Gains On ULIPs Will Be Calculated?

Published On Feb 07, 2022

As they combine the greatest qualities of an insurance plan with a market-linked investment plan, ULIP plans are a good investment decision. A portion of your premiums in a ULIP policy is used to provide you with life insurance, while the rest is invested in market-linked instruments such as stock, bonds, or balanced funds. The investment is made in accordance with your risk tolerance, financial objectives, and time horizon. Over the course of the policy's life, these ULIPs produce a profit.

How Capital Gains On ULIPs Will Be Calculated?

How Will ULIP Capital Gains Be Calculated?

ULIP returns are typically determined by your investment assets as well as factors such as ULIP costs and market performance. You may choose from large-cap, mid-cap, and small-cap equity funds, as well as ultra-short bonds, safe funds, and other investment alternatives. You may pick and select the assets you want. All funds are unique in their nature and offer varying risks and rewards. In general, high-risk funds with more equities provide larger returns, whereas low-risk funds with bonds provide steady returns.ULIP insurance returns can be calculated in two ways:

  • Absolute Returns:

Your ULIP's net asset value (NAV) is used to determine absolute returns. You may simply calculate your ULIP returns using the method below if you know the current NAV and the starting NAV (NAV at the time of purchase). ULIP expenditures such as fund management fees, surrender charges, operating charges, mortality charges, premium allocation charges, administrative charges, and so on are often deducted from NAV.

Absolute Returns =[(Current NAV- Initial NAV)/Initial NAV] *100 

For example, suppose your original NAV was $250 and your most recent ULIP value is $350. In this situation, your year-over-year absolute return is 40%. When the investment horizon is short, the absolute return technique is the most effective for calculating ULIP performance. This strategy, however, has several drawbacks. The absolute return approach solely calculates your profits based on your initial investment. The approach becomes meaningless if the investment is multiplied. As a result, the absolute return approach is only appropriate for estimating returns in the first few years. This method may be used to calculate your return at any point within the investment period.

  • Compound Annual Growth Rate (CAGR):

CAGR is another way to calculate your ULIP earnings. The CAGR approach calculates your ULIP investments' yearly increase over time.

CAGR = {[(Current NAV/Initial NAV) ^ (1/number of years)]-1} * 100

For example, suppose your initial ULIP NAV was $25 at the time of purchase and your newest ULIP NAV is $35 after five years. In this situation, the CAGR is 6.96 percent. The CAGR approach is useful for determining the ULIP return over a longer period of time. However, due to its disadvantages, this method is less common than the absolute return method. CAGR stands for compound annual growth rate. It does not account for the volatility of returns over time. This is a measure that has been used in the past.

Take Away

To earn greater returns on your ULIP plan, you can utilize the following strategies to manage your asset allocation between equities and debt. Your stock investment should be dependent on your age, according to experts. To earn secure returns as you become older, adjust your asset allocation more towards debt and less towards the stock. The finest ULIPs let you transfer between equities and debt funds without incurring any fees. You can adjust your asset allocation in response to market conditions to take advantage of attractive opportunities while avoiding volatility.

Also read-Is It Good To Invest ULIP? 

Should You Invest In ULIP In 2022?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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