When you look at Unit Linked Insurance Plan (ULIP) before and after the introduction of the Long Term Capital Gains (LTCG), you’ll evidently see a vast difference. A ULIP investment which was once known for its high charges is known for consistent ULIP performance, today. An investment in ULIP comes along with absolute returns. While certain investors who know what is ULIP are familiar with absolute returns, the rest of them are unaware of the concept.
So if you’re wondering how these absolute returns work in a ULIP Plan, keep reading to find out more. Take a look:
What are the types of returns offered by a ULIP Policy?
Investment in a ULIP Policy means the provision of two different types of returns. These returns are absolute returns and compounded annual growth rate, namely. A majority of insurance companies levy certain charges when it comes to calculating the different types of returns offered by a ULIP Policy. The said charges can be mortality charges, fund management charges, policy administration charges, and so forth.
What are absolute returns?
Popularly known as total returns, it is the value which is gained by the funds in the ULIP Policy over the course of the time. The prime use of absolute returns is to measure the appreciation and depreciation of these assets. Since these returns are not based on any benchmark, it is not linked to either the activities or the positions of the market. To be more precise, absolute return or total return is the profit or loss produced by the ULIP Policy in a given period of time.
How to calculate absolute returns in a ULIP Plan?
Since absolute returns are derived by the Net Asset Value (ULIP NAV), it is typically expressed as the percentage of the initial NAVs. In order to determine the performance of the ULIP Policy for a shorter duration, one can make use of these absolute returns. For instance, if the initial value of NAV is Rs. 200, and it further rises to Rs. 250, means that the absolute returns for the said ULIP Plan are 25 percent.
On the other hand, this method of calculating absolute returns in a ULIP Policy helps to determine the returns not only in the initial years but also any time during the period of investment. However, the use of this formula in the initial years proves more beneficial. While this method is majorly based on capital investment, it makes no sense to use this formula if you have a compounded investment.
Why should I invest in ULIP?
When you invest in a ULIP Policy, you are availed with innumerable benefits on a ULIP investment. One of the major benefits offered on ULIP investment is the exemption from the payment of taxes. According to Section 80C of the Income Tax Act, 1961, the premiums are deducted up to Rs. 1,50,000 on taxable income. Moreover, as per Section 10 (10D) of the Income Tax Act, 1961, the maturity benefits are absolutely tax-free.
Investing in a ULIP Plan also means flexibility in the selection of funds. Moreover, you can opt for switching from one fund to another if you aren’t satisfied with the outcomes. Since ULIP is a combination of investment and insurance, an investor can not only actively participate in equity markets but also secure his family by offering financial support, permanently.
Now that you know everything about absolute returns, what are you waiting for? Invest in a ULIP Policy to understand the processes of the different types of ULIP returns, separately. The main purpose of the existence of the ULIP policy is to protect your family in times of financial exigencies and allow generation of wealth for the investor.