A Unit Linked Investment Plan or ULIP is a hybrid financial product offered by insurance companies that combines the benefit of insurance and investment. A small part of the ULIP premium is allocated for life cover and the remaining is invested in market-linked instruments to offer you high returns over the long run. The product offers the dual benefit of insurance coverage and wealth creation opportunities. You can invest in equity, debt, or balanced funds at varying proportions based on your investment objectives and risk appetite.
ULIPs offer various benefits such as wealth creation, life cover, flexibility to switch between funds, transparency, liquidity through partial withdrawal, and tax benefits under Section 80C of the Income Tax Act. You can also customise the ULIP by including various add-ons or riders at an additional premium cost. Before you invest in ULIP, it is important to understand the ULIP returns and how this versatile financial tool can benefit you.
ULIP returns
Understanding ULIP returns involves knowing how your premium is allocated between investment and insurance, and how the investment in funds performs over time. The returns on a ULIP depend on the market conditions, types of funds, and performance of the funds chosen. For example, investment in equity funds can generate higher returns over the long-term considering the high risk and its potential to deliver good returns compared to debt funds. ULIPs also come with various charges such as fund management charges, premium allocation charges, mortality charges, and policy administration charges. It is vital to take account of these charges while calculating net returns from ULIP.
How to calculate ULIP returns?
Calculating the returns based on the CAGR (Compound Annual Growth Rate) method is a more effective way to evaluate the growth of your ULIP investment year-on-year for a specific period. The power of compounding over time is taken into consideration in this method. Calculating the ULIP returns is extremely easy with the ULIP calculator online, which uses the compound interest formula to estimate the future value of the investment or the returns.
What is a ULIP calculator?
ULIP calculator is a valuable online tool that helps you estimate the potential returns on your ULIP investment or the future value of your ULIP investment. ULIP calculator uses the following formula to calculate the CAGR on your investment:
A = P (1+r/n) nt
In this formula,
A – Amount of money investment accumulated over the years, including interest
P – Net annual investment amount after deduction of annual charges
r – Estimated rate of return in decimals (after deduction of charges)
n – Number of times the interest is compounded per year/ compounding frequency
t – Investment period in years
Instead of calculating manually, using the ULIP calculator helps you calculate ULIP returns in no time.
How to calculate ULIP returns using the ULIP calculator?
ULIP calculator can be used in simple steps. All you need to do is enter your details such as premium amount, policy term, and estimated rate of return. The calculator also considers the charges typically associated with the product. Select the fund allocation – equity, debt, or balanced funds. ULIP calculator instantly calculates the future value of your investment.
Let’s take an example to understand this. Let us say you are investing INR 1,00,000 annually in a ULIP with a policy term of 20 years. The expected rate of return is 10% per year and annual charges total up to 1%. That means net annual investment is (1,00,000 – 10,000 = 90,000) and net return is 9% per year. Once you input all the details in a ULIP calculator, it instantly gives you results for the future value of your investment using the following formula:
A = P [ {(1+r) t -1}/r]
= 90,000 [ {1+0.09)20 -1}/ 0.09]
= INR 46,04,400
That means, if your goal is to build a corpus of INR 46 lakhs after 20 years, you need to invest INR 90,000 annually in a ULIP that has a CAGR of 9%. ULIP calculator can be used to know the CAGR or to estimate the future value. If you have a target goal amount, you can also use it to calculate the amount you need to invest annually to reach that goal.
Conclusion
To conclude, the ULIP calculator is a useful tool available online to help you understand ULIP products, how to strategise your ULIP investment, the impact of charges on return, and how to plan for your financial goals using ULIP. Efficient use of the ULIP calculator helps you make an informed and cost-effective investment decision.
