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Know How ULIP Returns are Calculated

Published On Jul 26, 2021 10:00 AM By InsuranceDekho

ULIPs are the most favourable policies for a person looking for life coverage and  long-term investment in a single plan. The premium paid for ULIPs is divided to cater two things. One part of it is utilized for providing the life insurance coverage of the policyholder whereas the other part is directed towards investment in the stocks or funds in the market. The insurer pools the money invested by different investors and forms a single large fund to invest in the market. The insurer creates units with a specific face value for each of the units. The number of units allotted to a policyholder depends upon the premium amount he/she pays. 

The amount invested by the policyholder is divided with the face value of each unit and hence the units for each person are decided. The policyholder should decide to invest his/her money in shares, debt funds or in both of them. The policyholder also has an option of switching funds after the lock-in period of 5 years to get benefitted from the volatility of the market. The invested funds earn returns for the investor through the functioning of the fund market.

Calculation of the ULIP Returns

A person wishes to know the performance of his funds in the market. He/ she must know the method of calculating their returns on the investment of their money in funds. Let us in detail, how to calculate the returns on ULIP: 

The Return On Investment (ROI)  is influenced by two factors:

1. ULIP Charges: The ULIP plans impose certain charges on the policyholder viz., policy administration charge, fund management charge, premium allocation charge, and mortality charge. These changes vary from one insurance company to the other and are dependent on the insurer. 

2. Market Performances: Returns on ULIP are highly influenced by the market performance. It is necessary for a person to go through the history of the performance of funds before investing the money in it.

Methods to Calculate Your ULIP Returns

There are two methods to calculate your ULIP returns. 

1. Absolute Returns 

The absolute return( also known as total return) is the profit or loss made by the invested funds in a given time frame, which is mostly 1 year. It is the measure of the appreciation or depreciation of the assets.
The absolute returns are calculated using the net asset value of a ULIP. Net Asset Value is the per unit value of the assets less the expenses of an investment fund.

Three steps involved in calculating the Absolute Returns:

Step 1: Subtract the initial NAV ( NAV at the time of purchase) from the current NAV.

Step 2: Divide the value obtained from step 1 by the initial NAV.

Step 3: Multiply this value with 100 to get the percentage value of the absolute returns. 

Mathematical Representation: 

[(Current NAV-Initial NAV)/Initial NAV]×100

NAV at the time of purchase is 200 and it rose to 250 after a year.

Which gives,

[(250-200)/200]×100= 25%

Therefore, the absolute returns will be 25%

This method is effective only during initial investment. This method is used for calculating the returns for a short period of time, say, 1 year. They are not appropriate for long term investments as the investments are built on the compounding of the returns.

2. Compounded Annual Growth Rate ( CAGR)

It is the other method to calculate the ULIP returns. This method evaluates the annual growth of a person's investment during a specific period. It is useful for calculating returns for a longer period. 

Mathematical Representation:

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


Initial NAV is Rs.25 and it further rose to Rs.35 after 5 years. 

Substituting the values in the formula:

{[(35/25)^(⅕)]-1} *100= 6.9%

Therefore the percent value of CAGR is 6.9%.

The drawback of this method is that it depicts only the mean growth rate and doesn't consider the volatility of returns over a period of time. 

Also read - Why Should i buy Unit Linked insurance plans online?

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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