In layman’s language, Ulip is a two-in-one financial instrument. This hybrid instrument provides life insurance solution as well as investment of the policyholder’s fund in the equity and debt markets.
The past few weeks have seen a spate of ‘new’ Ulip products being launched. For the investor, the question is how effective these products are and how they can be compared with the other options that a investor has.
New Guidelines
The new Ulip guidelines kicked off from September 1. Here is a quick take on that before we compare it with mutual funds and pure insurance products.
* Minimum insurance cover has been raised to 7-10 times the first year’s annual premium amount. (The one he pays on an yearly basis and which is decided by the policyholder based on his income and age), up from 5 times the same, trying to promote it as an insurance product.
For instance for a policyholder below 45 years it would be 10 times his annual premium while for a policyholder above 45 years it would be 7 times. For single premium policies, the revised cover levels will be 125 per cent of the single premium for an age of entry below 45 years and 110 per cent of a single premium for an age of entry 45 years and above.
* The charges borne by the policyholder have been reduced and made easier to understand, spread across five years rather than the earlier three years.
The difference between gross and net yields is now capped at three per cent for a 10 year tenure and at 2.25 per cent exceeding 10 years.
* The lock-in period has been increased from 3 to 5 years. Also, partial withdrawals before the 5 year lock-in-period have been disallowed, encouraging long-term investment.
* Policyholders will get most of their money back on premature exit. Previously, charges for the early surrender of a policy could be as high as 100 per cent of premium paid.
* On maturity, a minimum guaranteed return of 4.5 per cent has been made mandatory. This ensures assured returns on long-term investment.
The biggest benefits for an individual investing in Ulips is lower charges, greater amount of the investor’s money will be invested in equities and bonds, and also the fact that the charges would be spread over the 5 year lock-in period, instead of a high upfront charge.
However it must be stressed that Ulips work better as an investment product rather than an insurance product — even that only when the policy holder chooses to stay invested for a long term of 12-15 years.
Overall, the new Ulips fare better than the old Ulips due to the above reasons.
Ulips vs MFs
High upfront charges including fund management fees, cost of insurance coverage, commission expenses and premium allocation charge meant that mutual funds scored over Ulips over an investment horizon of 3-5 years.
Uniformly spreading the charges over a five year horizon has made new Ulips more attractive than before. Over a long term investment horizon (12–15 years or more), Ulips can compete with mutual funds on a level playing field, whereas mutual funds are better for comparatively shorter tenures (i.e. 5-10 years).
Also the fact that the policy holder premiums come at regular intervals and therefore investments can be planned more evenly adds to this advantage for long
term investment.
Ulips vs Pure Insurance Products:
The minimum premium size of the new ULIPs has increased.
Previously, a unit-linked pension plan could be bought for a premium of ` 500 a month. The minimum monthly premium for LIC’s pension plus scheme, launched after September 1, is `1,500.
However it still does not work as a pure insurance product due the fact that ULIP policyholder takes an overwhelming majority of the investment risk, thus exonerating insurance companies, and the new guidelines doesn’t address that.
Therefore, the new ULIP is comparatively less competitive vis-à-vis pure term insurance products. Tax treatment could be different for all insurance products once DTC is implemented in 2012. For pure insurance products too, the returns could be taxed, unless the premium is under five per cent. In conclusion, a combination of term insurance and mutual funds could be more effective to meet both your insurance and investment needs adequately while Ulips is recommended only in the case of a long term investment exceeding 10 years.
(The writer is CEO of bankbazaar.com.)