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How capital gains on ULIPs will be calculated


When you have life goals to accomplish, the most important thing you require is wealth. It is with the help of wealth that you can easily fulfil your goals and live a financially independent life. The best way to ensure that your wealth grows to achieve it is by investing. There are many ways to ensure that your investments help you gain substantial returns on your investment.

ULIP is one such option that you can take advantage of to gain good returns and accomplish your long and short-term goals. In ULIPs, the returns that you get are based on your investment. If you have or are planning on investing in one and are confused as to how to calculate your capital gains; read on to know more.

How Will ULIP Capital Gains Be Determined?

What is a ULIP Policy?

A ULIP is a type of life insurance policy that offers the policyholder the dual benefits of investment and insurance in the same plan. Via investment, you get to invest in the following funds: equity, debt and balanced. While equity and debt funds have a different risk and return factor, balanced funds are a mixture of both. The funds you invest in are based on your appetite for risk and objectives.

Via the insurance aspect, your loved ones are given a life protection cover. If you were to pass away during the term of the plan, the insurer would give financial assistance to your family in the form of a death benefit. This amount would shield them from any life risks and provide them financial stability.

What are capital gains?

Capital gains are basically the returns that you get from the investment of your policy. There are two types of capital gains: short-term and long-term. The gains which you get when the holding period is more than 12 months are called long-term capital gains. Meanwhile, the gains that you get when the holding period is less than 12 months are called short-term capital gains.

How do you calculate these gains?

The following two methods can be used to calculate the gains:

1. By calculating absolute returns

Absolute returns are the returns that you get when you calculate the difference between the current NAV and initial NAV of your policy. This type of return is also known as point-to-point return.

The formula to calculate absolute returns is: [(current NAV-initial NAV)/Initial NAV]x100

In order to calculate absolute returns, you need to follow the steps:

  1. Know what your initial and current net asset value (NAV) is
  2. Subtract the initial NAV from your current NAV
  3. Divide the value that you get from this subtraction by the initial NAV
  4. Multiply the sum of this division by 100

This method is quite easy given that you know the values of the NAV. However, this method does not give an overall idea about your capital gains. Instead, it is beneficial if you are looking to see the gains on initial investment only.

2. Compounded Annual Growth Rate (CAGR)

If you want to calculate the annual returns for a specific time period of your policy, Compounded Annual Growth Rate or CAGR is how you calculate those returns. Using this method, the policyholder can calculate the overall annual returns of their plan.

The formula for calculating the CAGR is:[{(current value of NAV/initial value of NAV)^(1/number of years)] – 1}x100

The CAGR is helpful when it comes to getting a mean value about your returns. However, it is does not take into account the impact market volatility has on your investment. As your returns are impacted due to it, it is hard to predict what your actual gains could be.

These are the methods that are used to calculate the capital gains of your plan. You can get in touch with your insurance advisor to get an in-depth understanding about the gains and their calculation. If you are interested in investing, you can use the ULIP return calculator to see what the returns would be based on your investment.

Geneva A. Crawford
Twitter nerd. Coffee junkie. Prone to fits of apathy. Professional beer geek. Spent several years buying and selling magma in Miami, FL. Spent a year lecturing about psoriasis in Las Vegas, NV. Managed a small team writing about circus clowns in Las Vegas, NV. Garnered an industry award while writing about lint in the financial sector. Spoke at an international conference about getting my feet wet with dust in Libya. Spoke at an international conference about researching rocking horses in Bethesda, MD.