By Taivan Acer
Life insurance policies are one of the best ways to ensure our loved ones get the assistance they need when we’re not around anymore. One of the benefits of purchasing life insurance in this day and age is that you can buy or renew the policy and even file a claim online from the comfort of your home. Insurance companies now allow customers to purchase the plan through their official websites. Insurers like Tata AIG also allow customers to carry out the TATA AIA insurance renewal or purchase through their website.
Apart from the convenience of purchase, insurers also offer a myriad of choices to help customers purchase comprehensive policies like ULIP plans. Among the different insurance plan variants available, ULIPS are one of the most sought-after products.
What are ULIPs?
Unit Linked Insurance Plans are insurance plans that offer the dual benefit of insurance coverage and wealth creation. In this market-linked savings plan, the premiums that you pay are separated into two sections. The first part of the premium is kept for insurance coverage, and the second part is invested in market-linked funds selected by the policyholder.
One of the biggest advantages of ULIP is that you get to switch between debt and equity investments based on your risk profile during the plan’s tenure. With this method, you can invest in equity funds during the initial years to earn higher returns and switch to debt funds when the plan reaches maturity. Switching to debt funds will help you protect the returns you have earned through the investment.
While the mandatory lock-in period for ULIP plans in India is set at five years, it would help you maximize the returns you earn through the plan if you hold the investment for a long tenure. The returns you earn through the policy will determine the performance of the ULIP. Therefore, it is important to understand absolute returns in ULIPs and how they are calculated.
What is an Absolute Return?
Absolute returns are the returns that an asset achieves over a specific tenure. They are expressed as an estimate of the rise or fall of the asset’s value. The assets can either be mutual funds, stocks, etc. An absolute return is a loss or profits your portfolio has made in a given tenure.
Absolute Returns in ULIPs
In a market-linked savings plan like ULIP, there are two types of returns. The first is called absolute return, and the second is called the compounded annual growth rate. Most insurance companies usually charge a specific amount when calculating the different returns generated by ULIPs.
These charges can include surrender charges, fund management fees, mortality charges, premium allocation charges, etc.
Absolute returns in ULIPs are calculated by the initial and present Net Asset Values (NAV) of the ULIP. They are represented as a percentage of the initial NAVs. Therefore, they can be considered among the most effective ways of understanding a ULIP plan’s performance. For instance, if the initial NAV on a ULIP was ₹100 and it rises to ₹150, then the absolute return for the ULIP is 50%.
However, this method can have its disadvantages as well. For example, you may use the method to calculate your returns at any point during the investment. However, it is more advantageous if you can calculate the returns only during the initial years. It will help you determine the returns depending on your capital investment. However, it is not useful if the investment is compounding.
How to Calculate Returns in ULIPS?
For ULIPs, you can calculate the returns through two methods:
- Absolute returns:
To calculate the absolute return on a ULIP, you can use this formula
[(current NAV of the ULIP – Initial NAV)/Initial NAV]*100
- CAGR:
To calculate the ULIP returns over a specific tenure, you can use the formula listed below:
{[current value of NAV/Initial value of NAV)^(1/number of years)]-1}*100
Conclusion
Thus, ULIPs allow you to earn decent returns and protect your family through a single insurance plan. However, to earn the benefits of ULIP, it is important to learn about the absolute returns, as it will help you understand your ULIPs performance. Absolute returns in your ULIPs highlight the minor changes in your investment’s performance over time.
