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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. Investing is the best way to ensure that your wealth grows to achieve it. There are many ways to ensure that your investments help you gain substantial returns. With the help of wealth, you can easily fulfill your dreams and live a financially independent life.

ULIP is one option 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 about calculating your capital gains, read on to know more.

How Will ULIP Capital Gains Be Determined?

What is a ULIP Policy?

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

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

What are capital gains?

Capital gains are the returns you get from your policy investment. There are two types of capital gains: short-term and long-term. The gains you get when the holding period is more than 12 months are called long-term capital gains. Meanwhile, the gains 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 you get when calculating the difference between the current NAV and the initial NAV of your policy. This type of return is also known as a point-to-point return.

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

To calculate total 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 improvements on initial investment only.

2. Compounded Annual Growth Rate (CAGR)

If you want to calculate the annual returns for a specific 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 for your returns. However, it does not consider 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 used to calculate your plan’s capital gains. You can contact your insurance advisor to understand the payments and their calculation. If you are interested in investing, you can use the ULIP return calculator to see the returns 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.