ULIP is a financial tool that offers the combined benefits of insurance & market-linked investment. Under ULIP, a portion of the premium is allocated towards providing life insurance coverage, while the remaining amount, after applicable charges and allocations, is invested in market-linked funds. Investments are made in debt funds, equity funds, or balanced funds, depending on the financial objectives, risk tolerance level, investment horizon, etc.
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Before investing funds in any financial product, it becomes essential to evaluate its associated costs, risks involved, features, and potential returns. A ULIP Calculator helps estimate the potential value of an investment depending on certain factors, which include the premium amount, an assumed rate of return, and investment tenure. It is an online tool that helps in financial planning by providing an estimated corpus under multiple investment scenarios.
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How Does a ULIP Calculator Work?
- Collect Relevant Information
Collect all relevant details required to input into the ULIP calculator, such as premium amount, policy tenure, premium payment frequency, assumed rate of return, based on the calculator.
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Input the Required Details
Now, input the required details, such as age, premium amount, policy tenure, expected ROR, premium payment tenure, etc., to get the relevant results.
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Ascertain the Results
The ULIP return calculator lets you calculate the estimated investment value or corpus depending on the information entered and the assumptions used for calculation purposes.
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Try Different Situations
The ULIP calculator also lets you try different situations, such as changing the premium amount, changing the policy tenure, or analysing the outcome of different rates of return. It will help you make informed decisions depending on your financial & investment objectives.
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 a 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 – Initial Investment Value) / 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
CAGR = {[(35 / 25) ^ (1 / 5)] – 1} * 100 = 6.96%
Factors to be considered while using a ULIP Calculator
Provided are the factors to be considered while using an ULIP calculator:
- Premium Amount
Choose the premium amount that best suits your budget & financial objectives, & which is to be paid regularly, like every month, year, etc., throughout the policy tenure.
- Policy Tenure
Choose the policy tenure that best suits your long-term financial objectives. A longer investment horizon may provide more time for the investment to grow, subject to market performance.
- Choice of Funds to be Invested
Equity-oriented funds may offer high growth potential and carry high investment risk where debt funds have lower market risk with stable returns. The actual returns may differ depending on the market conditions.
- Associated Fees & Charges
Understand the associated fees & charges, such as administrative fees, mortality charges, fund management fees for making comparisons, & the different available plans.
- Expected Returns
While using a calculator, use a reasonable assumed return rate to make the estimated results remain realistic and hence not create unrealistic expectations.
ULIP Taxation
ULIPs offer a combined benefit of life insurance protection along with a market-linked investment factor, tax treatment of which is dependent on the applicable provisions of the Income Tax Act, 1961. In case the ULIPs are issued on or after February 01, 2021, the exemption under section 10(10D) is subject to an annual premium limit of INR 2.5 lakhs, along with other prescribed limits. In the case of more than one ULIP, the aggregate premium would be considered to determine the applicability of the exemption, subject to the prescribed terms and conditions. The exemption on death benefit is to be treated separately under the applicable provisions.
Hence, it is advised to review the premium amount, policy issue date, applicable tax provisions, and policy terms before assessing the tax treatment of ULIP proceeds. If the ULIP proceeds are taxable, the applicable tax liability can be calculated based on the taxable income and applicable Income Tax Slab for the relevant assessment year.
Conclusion
ULIPs combines life insurance coverage and market-linked investment components, which can be considered as a part of long-term financial planning. Investors should understand the basic terms and conditions of the plan and consider their financial situation, investment objectives and future financial obligations before investing. It is advised to consult a financial advisor to understand the basic terms & conditions of the plan, which will help you make an informed decision. One can plan for the ULIP depending on their financial situation & future financial obligations to get the financial security & avail tax benefits along with it.
FAQs
- Is there any tax advantage on the amount of premium paid?
A taxpayer may be eligible to claim a tax deduction for the premium paid of up to INR 1.5 lakhs annually under section 80C of the Income Tax Act, 1961, subject to applicable terms and conditions. This is applicable under the old tax regime, which offers a combined total limit of INR 1.5 lakhs under 80C, including other investments, such as PPF, life insurance premiums, ELSS, etc.
- Why should a ULIP Calculator be used?
A ULIP calculator helps investors:
- Understand the effect of premium amount and investment tenure on the estimated corpus.
- Estimate the potential investment value based on the details entered.
- Set the financial objectives and plan investment accordingly.
- Assess whether the planned investment amount aligns with their financial objectives.
- Compare the different investment situations by changing assumptions used for calculations.
