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How Will ULIP Capital Gains Be Calculated?

Updated On Feb 23, 2022

ULIP plans are a smart investment choice since they combine the best features of an insurance plan with those of a market-linked investment plan. In a ULIP policy, a portion of your premiums is used to provide life insurance, while the remainder is placed in market-linked assets like stocks, bonds, or balanced funds. Your risk tolerance, financial objectives, and time horizon are all taken into consideration when making an investment. These ULIPs generate a profit throughout the duration of the policy's term.

How Will ULIP Capital Gains Be Calculated?

How Will Capital Gains From ULIPs Be Calculated?

Your investment assets, as well as ULIP fees and market performance, are commonly used to calculate ULIP returns. Large-cap, mid-cap, and small-cap equity funds, as well as ultra-short bonds, safe funds, and other investment options, are available to you. You have the option to pick and choose the assets you desire. Each fund is distinct in its character and offers a range of risks and rewards. In general, high-risk funds with more stocks provide higher returns, whereas low-risk funds with bonds generate consistent returns. Returns on ULIP insurance can be computed in two ways:

  • Returns on Investments:

The net asset value (NAV) of your ULIP is used to calculate absolute returns. If you know the current NAV and the initial NAV, you can easily calculate your ULIP returns using the technique below (NAV at the time of purchase). Fund management costs, surrender charges, operating charges, mortality charges, premium allocation charges, administrative charges, and other ULIP expenses are frequently deducted from NAV.
*100 =[(Current NAV- Initial NAV)/Initial NAV] Absolute Returns =[(Current NAV- Initial NAV)/Initial NAV]
Let's say your initial NAV was $250 and your most recent ULIP value was $350. Your year-over-year absolute return is 40% in this circumstance. The absolute return method is the most effective for calculating ULIP performance when the investment horizon is short. However, there are some disadvantages to this method. The absolute return method determines your returns entirely on the basis of your initial investment. When the investment is multiplied, the strategy loses its purpose. As a result, the absolute return method is only useful for predicting returns in the first few years. At any time throughout the investing term, this approach may be used to compute your return.

  • CAGR (Compound Annual Growth Rate):

Another technique to compute your ULIP profits is to use the compound annual growth rate (CAGR). The CAGR method measures the annual rise in your ULIP investments over time.
[(Current NAV/Initial NAV) (1/number of years)] CAGR = [(Current NAV/Initial NAV) (1/number of years)100 * -1
Assume your first ULIP NAV was $25 when you bought it, and your most recent ULIP NAV is $35 after five years. The CAGR, in this case, is 6.96 percent. For calculating the ULIP return over a longer period of time, the CAGR method is beneficial. This approach, however, is less popular than the absolute return method due to its drawbacks. The compound annual growth rate is abbreviated as CAGR. It ignores the fact that returns fluctuate over time. This is a method that has already been employed.

Take Away

You can use the following tactics to control your asset allocation between stocks and debt in your ULIP plan to obtain higher returns. According to experts, your stock investment should be based on your age. Adjust your asset allocation more towards debt and less towards stocks as you become older to achieve more stable returns. The best ULIPs allow you to switch between equity and debt funds without paying any fees. To take advantage of excellent opportunities while minimizing volatility, you can modify your asset allocation in reaction to market circumstances.

Also read- 3 Ways To Maximize ULIP Returns!

Understand How ULIP Premium Is Used

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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