How to Calculate Returns from ULIP Plan?

ULIP can provide substantial returns by investing in the right funds and selecting a longer tenure. You can calculate the returns beforehand to optimise the terms and earn maximum profit. Many factors can influence the payout of a ULIP plan, making it challenging to determine the exact amount.

Instead, you can get an estimation of the returns and plan your finances accordingly. Here are some ways to calculate ULIP returns, their dependence on various factors and some of the associated limitations.

ULIP returns refer to the amount that an investor receives upon maturity of the policy. Once an individual deposits their money in ULIP, a part of the premium is kept as a sum assured. The other part is invested in money market funds.

At the end of the tenure of ULIP, the policyholder can receive either the sum assured or fund value or both. Investing in the right assets ensures maximised returns to help you fulfil your financial goals immediately.

The profits earned from your investments in equities and debts keeps accumulating, leading to wealth creation. At maturity, you can raise a claim for receiving the returns from these policies. You can receive either the sum assured or fund value, whichever is higher, in case of type 1 ULIP.

On the contrary, for type 2 ULIP, you will be able to receive both leading to a higher return. However, you should note that the premiums also vary considerably between both the types of ULIPs. Furthermore, you can extend your policy duration by five years before maturity to increase policy payouts.

1. Absolute Returns

It is calculated based on the NAV of the assets where you are depositing your money. You only have to know the NAV at the time of investing and the current NAV, and use the formula below to estimate your returns.

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

2. Compound Annual Growth Rate (CAGR)

Here, the current and the initial NAV are also needed, along with the number of years. Using these values and the formula below, you can quickly estimate the annual growth of ULIP investments over a set period.

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

Here NAV refers to the net asset value of your policy that you can calculate using the formula below:

NAV = Total value of ULIP policy – ULIP expenses

These ULIP expenses include fund management fees, operating charges, surrender charges, mortality charges, administrative charges, premium allocation charges, and so on.

You can also use an online calculator to estimate returns from your ULIP policy. You have to follow some simple steps to maximise your returns from these policies:

Step 1: Move to the official website of an insurer.

Step 2: Visit the returns calculator on the ULIP page.

Step 3: Enter the values accurately in the required fields of the calculator.

Step 4: Click on the ‘View Plans’ button.

Once done, you can estimate your returns from ULIP investment. These free online tools can save you from the burden of manual calculations and minimise the chances of errors.

Several factors influence the returns from ULIP policies. These are as follows:

• ULIP Charges: There are several additional charges like discontinuation charges, administration charges, fund management costs, fund switching charges, premium allocation costs, and mortality charges that you will have to pay.
• Asset Classes: The performance of asset classes varies significantly from each other. Hence, it would be prudent to park your funds in high-performing assets to get maximum returns.
• Market Trends: Tracking past market performance for an asset you want to invest in is essential. This will help you to get an accurate estimation of your returns from this policy.
• Duration of Investment: ULIP investment over an extended period can ensure high returns. So, you can invest for up to 10 to 15 years to earn increased profits. The long-term perspective here aligns with the benefits of life insurance, which often aims for sustained financial support over time.

Based on the above factors, you can build a realistic expectation of the returns from your investment in this policy.

Some of the notable limitations associated with ULIP returns are as follows:

• Complex Calculations: The calculations associated with ULIP returns are usually complex and prone to errors. Thus, estimating the returns accurately before investing becomes challenging.
• Additional Costs: Numerous additional charges can considerably reduce the returns from your investment. Hence, you should invest carefully in money market instruments for substantial returns.
• Market Fluctuations: Unprecedented fluctuations in the money market can occur for various reasons. Since these assets' performance depends on market sentiments, it becomes difficult to predict returns.
• Fund Switching: Switching funds at the right time is essential to protect yourself from extensive losses. If you delay it, you might have to bear unrecoverable losses from your investments.
• Selecting the Right Assets: Choosing the best assets is essential to enjoy high returns on investment. For this, it is necessary to track the performance of the assets to know if they would be profitable enough.

Knowing how to calculate ULIP returns can help you estimate your investments in the plan. Also, you can plan your financial goal and assess their completion based on the maturity date of your policy.