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How to Calculate Your ULIP Returns?

Measuring your ULIP returns can help you track the performance of your investment and make informed financial decisions. Read this blog to learn more about ULIP returns.

  • 4,011 Views | Updated on: Jun 07, 2024

Imagine a financial instrument that combines the power of insurance protection with the potential for market-linked growth. That is exactly what ULIPs offer - a unique blend of security and opportunity, designed to make your money work harder for you. But how do you calculate the success of your ULIP investment? How can you unravel the complexities and uncover the true potential of your returns?

From explaining the components that contribute to your overall gains to exploring the tools and techniques that enable precise evaluation, this blog will equip you with the knowledge and insights necessary to gauge the performance of your ULIP with confidence.

What are ULIPs?

A ULIP is a combination of insurance and investment, where a portion of the premium paid is used to provide life insurance cover, and the rest is invested in different funds. The returns on a ULIP are dependent on the performance of the underlying funds, and the policyholder can choose to invest in equity, debt, or a combination of both.

Also Read: What is ULIP and Its Benefits?

Ways to Measure ULIP Returns

Investing in ULIPs offers a unique blend of insurance coverage and market-linked returns. However, to truly gauge the effectiveness of your ULIP investment, it becomes crucial to assess the returns it generates. Evaluating ULIP returns requires a strategic approach, considering various factors such as investment tenure, fund performance, charges, and market conditions. By delving into the realm of ULIP measurement techniques, we unravel a fascinating landscape that empowers investors with the knowledge and tools to make informed decisions.

Let us explore the diverse ways in which one can measure ULIP returns, unlocking the potential of this dynamic investment avenue.

Net Asset Value (NAV)

The NAV is the value of a unit of a mutual fund or an equity-oriented fund. It is calculated by dividing the total value of all the assets in the fund by the number of units issued. The NAV is the most straightforward and accurate way to measure the returns on a ULIP. It reflects the performance of the underlying funds and gives an idea of how much the fund has grown over a particular period. You can check the NAV of the fund you have invested in on the fund house’s website or through the policy statement provided by the insurer.

Maturity Value

The maturity value is the amount you will receive at the end of the policy term. It is calculated based on the NAV of the underlying funds, the premium paid, and the charges deducted. The maturity value is the total value of the investment, including the bonus (if any) and the death benefit (if the policyholder passes away during the policy term). You can calculate the maturity value of your ULIP by using a ULIP calculator or by getting in touch with the insurer.

Surrender Value

The surrender value is the amount you will receive if you decide to terminate the policy before the maturity date. It is calculated based on the NAV of the underlying funds, the premium paid, and the charges deducted. The surrender value is usually lower than the maturity value as it does not include the bonus (if any) and the death benefit (if the policyholder passes away during the policy term). You can calculate the surrender value of your ULIP by using a ULIP calculator or by getting in touch with the insurer.

ULIP Calculator

A ULIP investment calculator is a useful tool that can help you calculate your returns on a ULIP investment. It is a simple and easy-to-use tool that requires you to enter the premium amount, policy term, and the fund in which you have invested. The calculator will then provide you with an estimate of the maturity value and the returns on the investment.

Policy Statement

The policy statement is a document provided by the insurer that contains all the details of your ULIP policy, including the premium paid, charges deducted, the NAV of the underlying funds, and the maturity value. It is a useful tool to measure your returns on a ULIP investment as it provides a detailed view of the investment over the policy term.

ULIP Returns are stressing you out? Let’s calculate them and get an estimation.

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How Does an Investment Calculator Work?

Now that you are aware of methods that can help you measure the returns on ULIPs, there is one more investment formula that can be used to calculate the ROI:

ROI = Net income / Cost of investment x 100

Apart from this formula, there are calculators that can help you with measuring growth and return on investment. Let us now examine how an investment growth calculator work.

An investment growth calculator is a tool that helps individuals assess and analyze various aspects of their investments. It typically provides information on investment returns, growth projections, and other financial metrics.

While there can be different variations of investment calculators, here’s a general overview of how they work:

Input Parameters

The user enters specific details related to their investment, such as the initial investment amount, the expected rate of return, the time horizon, and any additional contributions or withdrawals.

Calculation of Compound Interest

Using the provided parameters, the investment calculator calculates compound interest. It is the interest earned on the initial investment as well as the accumulated interest from previous periods. It takes into account the compounding period, which can be annually, semi-annually, quarterly, monthly, or even daily.

Growth Projection

Based on the specified time horizon and the compound interest calculation, the investment calculator provides a growth projection. It shows how the investment is expected to grow over time.

Additional Contributions/Withdrawals

If the user specifies additional contributions or withdrawals during the investment period, the calculator incorporates those amounts into the calculations. It considers how these contributions or withdrawals affect the overall investment value and the subsequent growth projections.

Comparison and Analysis

Some investment calculators allow users to compare different investment scenarios. For example, they may provide side-by-side comparisons of different investment options or varying parameters like interest rates or time horizons. This allows users to assess the potential outcomes and make more informed investment decisions.

Display of Results

Once all the calculations are completed, the investment calculator presents the results in a clear format. It typically shows the projected investment value, total contributions made, interest earned, and any other relevant financial metrics. The results may be displayed in tables, graphs, or charts for easy interpretation.

It is important to note that investment calculators provide estimates and projections based on the inputs provided by you. They are tools to help you gain insights into your potential investment outcomes. Still, the actual performance of investments may vary due to factors like market volatility, changes in interest rates, and other external influences.

Variables Involved in Investment Calculator

When creating an investment calculator, several variables are typically involved. These variables help calculate and analyze the growth and returns on investment. Here are some common variables used in investment calculators:

Principal Amount

The principal amount refers to the initial sum of money that is being invested or borrowed. It is the starting point for calculating returns or interest on an investment.

Interest Rate

It is the rate at which the investment grows over time. It is usually expressed as an annual percentage and represents the return on investment or the rate of interest earned on the principal amount.

Time Horizon

It is the duration for which the investment is expected to be held. It is usually measured in years and is an essential factor in calculating the investment’s growth and potential.

Contribution

Contributions refer to additional amounts of money that you plan to invest periodically on top of the initial principal. It could be regular monthly or annual contributions to the investment.

Contribution Frequency

Compounding frequency determines how often the interest is calculated and added to the investment. It can be annually, semi-annually, quarterly, monthly, or even daily. The more frequent the compounding, the faster the investment grows.

Inflation Rate

It is the rate at which the general level of prices for goods and services is rising and, subsequently, eroding the purchasing power of money. Including the inflation rate in the calculator helps provide a more realistic estimation of future returns.

Dividend Yield

The dividend yield is a financial ratio that indicates the dividend income earned from an investment relative to its price. It is expressed as a percentage and is calculated by dividing the annual dividend by the investment’s current market price.

Capital Gains Tax

It is the tax imposed on the profits made from selling investments. It is based on capital gain, which is the difference between the purchase price (cost basis) and the selling price of the investment.

Expense Ratio

The expense ratio represents the annual operating expenses associated with managing an investment, typically expressed as a percentage of the investment’s total assets. A lower expense ratio is generally desirable as it reduces the impact of expenses on the investment’s overall returns.

Reinvestment

It refers to the practice of reinvesting the investment’s earnings, such as dividends or capital gains, back into the investment rather than withdrawing them. Reinvestment can compound the growth of an investment over time, potentially leading to higher returns.

These variables, along with any additional parameters or assumptions, are used to calculate the future value of the investment, including the total investment growth, compound interest, and any tax or fee implications.

Wrapping Up

Measuring your ULIP returns can be a bit tricky, but it is essential to understand how to do it correctly. Your choice of ULIPs may contribute to the creation of a useful corpus, which may thereafter be helpful for you and your loved ones’ objectives.

Regularly monitoring and evaluating your ULIP returns will empower you to optimize your investment strategy and achieve your financial goals. While ULIP returns may vary over time, maintaining a disciplined approach, staying updated with market trends, and seeking professional advice when needed will ultimately contribute to a rewarding financial future.

So take charge of your ULIP investments today and unlock the potential for long-term wealth creation and financial security.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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