After the Insurance Regulatory Development Authority (Irda) capped charges on unit-linked insurance plans (Ulip), insurers have started trying their hand at low-cost products. Aegon Religare, for example, is advertising its Invest Maximiser Plan as ‘Sabse Sasta Ulip’. And, Reliance Life Insurance has come up with Premier Life.
These products do live up to the advertisements, for they have reduced the biggest expense for investors in Ulips — the premium allocation charge (PAC). Invest Maximiser charges 5 per cent PAC in the first year, 2 per cent in the next three years and zero from fifth year onwards. Reliance Premier Life charges a PAC of 6 per cent just in the first year.
This is in contrast to what insurance companies do. Insurers keep allocation charges high in the first year. Or, if the first year charges are low, the PAC continues for the full policy term.
Both the policies have all other features of Ulips. In Aegon Religare’s policy, the investor has the choice of four funds. These include two debt funds, a balanced fund and a pure equity fund. The minimum yearly investment is Rs 12,000 and if the person opts for monthly payment, the amount is Rs 2,000. The PAC is Rs 40 per month.
Reliance’s Premier Life is offering eight funds. These include two equity funds, a corporate bond fund, a money market fund, a gilt fund, an infrastructure fund, an energy fund and a mid-cap fund. The minimum annual payment in Premier Life is Rs 6,000. The PAC is Rs 80 per month.
In Invest Maximiser, the sum assured is five times the annual premium. But the person may need to go through medical tests if the sum assured crosses Rs 12.5 lakh. This will depend on the insured’s age. A 35-year-old male needs to go through the tests if the sum assured crosses Rs 30 lakh. A 45-year male will have to go through the tests if the amount is more than Rs 20 lakh.
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Lower charges have generated a lot of interest among investors. “Premiums from this policy contributed around 19 per cent of our product portfolio,” said Yateesh Srivastava, chief marketing officer of AEGON Religare Life Insurance Company.
These policies do have cheaper costs compared to other Ulips but financial planners said due to the lower sum assured, these might not be feasible for a large number of buyers. Most financial planners advise against mixing insurance and investments. They said mutual funds combined with a term plan was always a better option, especially after as entry load on mutual funds has been abolished.
Even if an investor finds value in the product for a longer term, the sum assured can act as a hindrance. “The sum assured is just five times the premium. This means it may not be able to provide adequate risk cover to a person’s goals over the long term,” said a certified financial planner.
For a small investor, PAC may be a big deterrent. In Reliance Premier Life, policy charges are Rs 80 per month. If a person is annually paying Rs 12,000 premium, administration charges will be around 8 per cent of the annual premium paid. This is essentially high as PAC covers insurance companies’ back-office costs.