“ULIP Calculator: A Practical Guide for Smart Investors”
A Unit Linked Insurance Plan, i.e. ULIP, is a financial tool that offers the combined benefit of insurance & investments. It provides the dual advantage of wealth creation & policyholders’ life coverage. This includes allocating a part of the premium towards life insurance, thus ensuring financial security to the policyholder’s family members in case of any unfortunate event. Additionally, the remaining part of the premium is allocated towards the market-linked funds depending on the risk tolerance level, investment horizon, & financial objectives. This involves investing in debt funds, equity funds, or balanced funds, where the ULIP’s performance is market-linked.
A ULIP return calculator is an online tool that helps plan, evaluate, & calculate the potential returns on investment made under ULIPs. It includes entering the desired amount of investment & its policy tenure, after which the calculator will assess the maturity value. The mathematics & algorithms involved help evaluate & process the inputs & provide projections to the policyholders about the investment value. Thus, it helps in making well-informed decisions to attain financial security. It also helps in comparing different investment options available & assessing the potential for achieving financial objectives. A ULIP return calculator is one of the most popular financial tools that can be used to help you plan & evaluate investments in a ULIP plan, considering various factors, like premium amount, tenure, age, rate of return, etc.
How Does a ULIP Calculator Work?
Once you have understood the meaning of ULIP & ULIP calculator, let us now understand the steps to be followed while using a ULIP calculator:
- Input parameters:
Provide the information related to your ULIP, which will include details such as premium payment frequency, amount of investment, investment horizon, estimated rate of return, etc. Additionally, it will require mentioning the type of funds in which you want to invest, i.e. debt, equity, or balanced funds.
- Algorithmic Processing:
The ULIP calculator processes the input by applying all the relevant algorithms & formulas. At this stage, factors like investment growth, compound interest, insurance-related mortality expenses, etc., are taken into consideration.
- Investment Projection:
Next, the calculator will estimate the potential returns the ULIP will provide after the completion of policy tenure. This projection is made taking into consideration the investment growth, the power of compounding, future expenses, etc.
- Maturity Value:
The calculator will then determine the maturity value, i.e. the amount that a policyholder will be getting at the time of maturity. The already mentioned factors & performance of the underlying assets will affect the amount of maturity.
- Comparison (Optional):
Some of the calculators also assist in making the comparison between the different available plans, which will help compare the outcomes, letting you make an informed decision.
- Results Display:
The ULIP calculator, after processing the details provided, will display the outcome in terms of maturity value, expected growth, or any other relevant detail, such as the fund’s performance, tax implications, etc.
- Adjustments & Iterations:
Investors can make adjustments to check the output under different situations. This can be done by changing the inputs & checking the outcomes in terms of premium amount, expected returns, policy tenure, etc. This will help investors to make an informed decision & well align their funds with future financial objectives, risk tolerance level, & investment horizon.
Formula to Calculate ULIP Returns
There are two formulas available to calculate ULIP returns using a ULIP Calculator. Let us evaluate them:
- Absolute Returns
It depicts the percentage increase in the value of ULIP over a period of time. The negative return shows depreciation, & the positive one shows an appreciation in the value of an asset.
Absolute returns = [(Current value – Value at the time of purchase) / Value at the time of purchase] x 100
For instance, the initial NAV = INR 250
Current ULIP NAV = INR 350
Absolute Returns = {(350 – 250) / 250} * 100 = 40%
- CAGR ( Compound Annual Growth Rate)
The compounded annual growth rate depicts the annual growth of an investment over a specified period of time.
CAGR = {[(Current value / Value at the time of purchase) ^ (1 / number of years)] – 1} x 100
For instance, the initial NAV = INR 25
Number of Years = 5
Current ULIP NAV = INR 35
Absolute Returns = {[(35 / 25) ^ (1 / 5)] – 1} * 100 = 6.96%
Which Formula should be used?
The use of the above formulas to calculate ULIP returns should be assessed depending on certain parameters:
| Basis of Difference | Absolute Returns Method | CAGR Method |
| Time Period | In case of short term, i.e. less than 1 year | In the case of long-term, i.e. above 1 year |
| Complexity | Easy & simple to calculate | Use the compounding method |
| Investment Type | One-Time investment mode | Long-term investment mode |
Principles on which a ULIP calculator works
Provided are some of the factors that should be considered while using a ULIP calculator:
- Investment Tenure
The number of years for which funds are to be invested.
- Premium Amount
The amount of contribution to be made either in a lump sum or through regular instalments.
- Expected Rate of Return
It is the estimated rate of growth which will depend on the type of funds, i.e. debt, equity, or balanced funds.
- Type of Fund
There are different types of funds available, which have their own risk & return involved.
- Policy Charges
It involves certain charges, such as mortality charges, fund management fees, premium allocation charges, switching charges, etc.
Conclusion
ULIP Return Calculator is a simple & easy-to-understand financial tool that helps us ascertain the premium amount & the expected rate of return. It also helps in choosing a portfolio that will depend on the investor’s acceptance of taking the risk. However, these calculators also work on a presumption & past performance basis, & they may not deliver the results accurately. Hence, it is advised to be more cautious while using calculators before investing in ULIPs.
