Financial Planning is a method to assess & manage the present financial health, which includes incomes, expenses, debts, savings, etc., to achieve your short-term & long-term financial objectives. This includes assessing, setting a financial objective, budgeting, investing, insurance, reviewing & making amendments in the plan.
When it comes to buying a ULIP, a ULIP is a financial tool that provides financial security along with market-linked returns & taxation benefits.
To make an informed decision, it becomes crucial to understand how to align the premium amount, expected returns, & policy tenure with your financial objectives. This is where a ULIP calculator comes into existence, helpful in estimating returns & comparing different options available, thus choosing a plan that best suits the financial plan selected.
What is a ULIP Calculator?
A ULIP Calculator is an online tool that helps calculate the potential returns on investment made under ULIPs. By just entering the desired amount of investment & its tenure, the calculator will assess the maturity value. Thus, it helps in making well-informed decisions to attain financial security. It also helps in comparing different investment options available & evaluating the potential for achieving financial objectives.
Reasons to Use a ULIP Calculator for Financial Planning
By providing the amount to be invested, investment tenure, & expected rate of return, one can ascertain the maturity amount. ULIP calculator also helps with financial planning, by evaluating different investment options & hence making well-informed decisions. Let us know the reasons to use a ULIP calculator for financial planning purposes:
Visualising Future Outcomes
A ULIP calculator helps visualise the future by calculating the future value of your investment in the next 10, 15 or 20 years, providing realistic expectations.
Testing Multiple Scenarios
It allows for testing the outcome in multiple scenarios by providing different inputs. This means one can enter different premium amounts, risk level, policy tenure, or allocation of funds to check which combination best suits you. Finding an appropriate combination of all such factors lets you make an informed decision.
Comparing Plans
Before making an investment, one can compare the different options available using the ULIP calculator. Comparing different plans available helps to assess which option best aligns with the financial objectives of an investor, providing maximum returns.
Understanding the Impact of Charges
There are many charges associated with ULIP, such as fund management charges, premium allocation charges, mortality charges, etc. ULIP calculator helps you ascertain the impact of these charges on your returns, providing an accurate estimate of net returns receivable, ensuring the cost-effectiveness of the plan.
Assistance in Goal-based Planning
When you are clear with your financial objective, a ULIP calculator helps you achieve that goal by letting you know the premium & policy tenure required.
Monitoring & Adjustments
Every plan implemented needs to be monitored & reviewed, & so is ULIP. This means once the funds are allocated, an investor should review the projections made earlier using a ULIP calculator & compare them with actual performance. Once you have monitored & reviewed the same, make necessary adjustments, i.e. switching between the funds in case growth is not up to the mark.
Modifications of Return Assumptions
As we know, ULIP returns are market-linked, keep on varying with time. A ULIP calculator helps you put different inputs in terms of different rates of return to assess the growth of investments made. This allows us to design an accurate plan & understand how the small changes in the returns can have an effect on the long-term wealth.
Also Read: Top 10 Instant Loan Apps in India
Formula to Calculate ULIP Returns
I. CAGR ( Compound Annual Growth Rate)
The compound annual growth rate represents the annual growth of an investment over a specified period.
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%
II. 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%
Factors to be considered before opting for a ULIP
Provided are the factors to be considered before we opt for a ULIP:
ULIP charges
ULIPs come with certain associated fees & charges, such as fund management charges, premium allocation charges, mortality charges, etc. An investor should look for a ULIP that comes with lower ULIP charges to get the best net returns.
Risk vs. return
As we know, ULIPs are market-linked, hence they do not offer assured returns. So, before investing, you should be clear about the risk exposure levels.
Lock-in period
Check for the lock-in period, as for that particular duration, the funds are blocked, not providing liquidity.
Underlying fund performance
These calculators presume an average return while providing results, which may differ from the real performance of an underlying fund. An investor should refer to the past performance of the underlying fund, considering that it cannot be considered to be the assured future returns.
Tax treatment
The premium paid towards ULIP is allowed as a deduction of tax u/s 80C of the Income Tax Act, 1961. Additionally, the maturity & death benefits are exempt from tax u/s 10(10D) of the Income Tax Act, 1961, subject to certain limits & conditions.
Conclusion
ULIP Return Calculator is a simple, easy-to-understand, & effective tool that helps us ascertain the premium amount along with the expected rate of return. It also helps in selecting a portfolio based on the investor’s willingness to take the risk. However, these calculators also work on a presumption & past performance basis, & they may not deliver accurate results. Hence, it is advisable to exercise greater caution when using calculators before investing in ULIPs.
Digital Impetus