Why should you compare Ulips?Ulips are complicated products and there is no clear winner in this race. Various plans offer different benefits. A detailed effect of charges on your fund needs to be seen before arriving at a decision.
09 Sep 2009
Ulips (Unit linked insurance plan) can be safely termed as modern day best-sellers in the Life insurance segment. True to its reputation, these are quite literally a seller's product rather than a buyer's product. Ulips have been the favorites of Life insurance agents who have aggressively propagated this product. So what does a common man do with a plethora of Ulip plans which are available in the market. How does he come to a decision whether to buy it or not? Should he just trust the product the agent is aggressively trying to sell? Or should he do his own research and decide for himself? How can a common man shortlist his plans?
We present here main parameters which one needs to understand to compare with the peer products to arrive at a decision.
Premium Allocation Charges: This is one parameter one needs to be alert about as it could be the main differentiator between a good and a bad Ulip product. These are basically the distribution charges which go in the agent's kitty. This charge is primarily the root cause of Ulips being aggressively marketed. The charges vary to a great extent between plans, with the bulk of the charges charged in the first year, declining in the subsequent years. They lie in a wide range of 0%-100% of your first years premium with the average being around 25% for first year. Due to this wide disparity one needs to compare these charges before arriving at a decision.
While comparing these charges one should carefully read the documents provided by insurance companies. Some companies claim to allocate 100% of first years premium towards guaranteed maturity addition. This is sometimes incorrectly comprehended as 0% allocation charges.
For e.g: 1st year's premium = 100000
Tenure = 15 yrs.
1st year premium allocated towards Guaranteed Maturity addition of 130% of
first years premium.
What this means is at the end of 15 years you will get a guaranteed addition of 130000(130%*100000). Now discounting this at a modest rate of 6% we get a present value of 54244.
In short only Rs.54244 out of your first years premium of Rs.100000 were invested. This means that there is an unstated charge of 45.75%. Hence we can see that comparison of these charges is absolutely necessary be it disclosed charges or unstated as the above example.
Fund Options: The premium amount you invested minus the premium allocation charge is then invested into various funds offered by Insurance companies. Each fund typically has two components, Equity & Debt with a cap on the minimum and maximum exposure to the two components. One needs to compare the different fund options and choose the preferred exposure to equities & debt based on your goals and age. There is also an option of free switching between funds for a specific number of times in a year. The fund options offered under each plan vary from 3 to 9.
Fund Management Charges:
This fund value then grows/reduces according to market conditions and performance of the fund. At the end of every year the balance fund value is then subjected to a fund management charge which varies typically from 0.5% to 2.25% of fund value. Hence a need of comparing these charges and deciding the fund you want to opt for. Higher the equity component of the fund, higher the probablity of growth & fund manager skills thus the higher charges.
Ulips typically have a minimum term of 5 yrs with the upper end being 75. It however makes less sense to enter this product with a short term horizon. The minimum time to be in the policy should ideally be15 yrs. This stems from the fact that Ulips have very high charges in the initial years declining to as low as 1%-2% in the 4th yr onwards leaving a significant amount to grow in the funds. Hence one needs to compare the term being offered and opt for a term of 15 or above to make the most of this product.
The Death benefit is typically
Higher of Sum Assured and Fund value
Fund value + Sum Assured.
However plans with Fund value+ Sum Assured are not necessarily the most beneficial as their premium allocation charges, Policy administration charges could be significantly higher as compared to policies offering Higher of Sum assured or fund value benefit thus bringing down the fund value in the former case. Hence it is necessary to compare two plans with different benefits in line with their charges.
In majority of the plans the maturity benefit is the fund value. In some cases you get a guaranteed maturity benefit addition. As explained earlier plans with such options are not necessarily the best buys as it involves high costs in the initial stages.
Ulips are complicated products and there is no clear winner in this race. Various plans offer different benefits. But one needs to understand with each benefit comes a cost. Now these costs vary across plans and hence a detailed effect of charges on your fund needs to be seen before arriving at a decision. These are the primary 5 parameters you should look at before arriving at a decision. So before buying a Ulip, question yourself about your needs, your age, your risk taking ability to venture out in equity funds and then get this dual product of Insurance with Investment.
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