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Newer unit-linked insurance plans (Ulips) have become more transparent and cost-effective than previous versions, as a result of the Insurance Regulatory and Development Authority of India (Irdai)’s came down on hard against such schemes three-four years ago. However, they are still not ideal products for policyholders.
The new offering by SBI Life, which targets high net worth individuals, is no different. Smart Privilege, the new product, is being offered for a minimum premium of Rs 6 lakh per year. The novelty lies in the options, as many as eight, including 60 per cent equity and more. There is also an option of investing in mid-cap stocks.
However, the product is more expensive than SBI’s other Ulip e-Wealth Insurance. This scheme does not have premium allocation charge, which means a higher share of the money gets invested and the fund value increases. As against this, in Smart Privilege there is a premium allocation charge of 2.5 per cent up to the fifth year, after which it is free. The fund management charge in both cases is 0.5-1.35 per cent.
While SBI’s e-Wealth Insurance is available online, Smart Privilege is not, indicating that the target may be the bank’s existing customers.
“If someone decides to invest in Ulips, look for a policy that has zero premium allocation charges. Earlier, companies used to charge as high as 10 per cent. While this has come down, there are companies that continue to charge six-seven per cent,’’ Deepak Yohanan, founder and chief executive officer (CEO) of MyInsuranceClub.com.
When compared with mutual funds, these products do not fare too well. But as compared to MFs, there is not really much to choose from in case of Ulips. “Since insurance companies have to follow strict regulations with regard to where they can invest, the difference is only in the levels of risk, that is, equity exposure,’’ adds Yohanan.
“Concentration risk is a big challenge for Ulips. If you are investing a huge amount of money over the long term in one fund and if it performs badly, there is no recourse but to exit, which is the worst possible situation. But, in mutual funds, you can switch from a fund that is not performing well,’’ points out Suresh Sadagopan, founder, Ladder7 Financial Advisory.
HNIs looking for cheaper options to invest in equities would be better off choosing exchange-traded funds, index funds or direct MFs. Charges for ETFs are 0.1-04 per cent and for MFs they are 1.25-1.5 per cent. Historically, MFs have performed better than insurance funds of the same company. Besides, the net asset value (NAV) of MFs is net of all charges, but in case of Ulips expenses such as fund management charges, mortality charges, etc, have to be deducted from NAV. So, returns could be misleading for investors, Sadagopan says.
For instance, according to data from Value Research, as on June 28, SBI Life Bond fund has an NAV of Rs 26.93. The one-year return is 9.63 per cent. In comparison SBI MF’s Corporate Bond Fund, has an NAV of Rs 24.37 and the one-year return is 9.69 per cent. So, while the NAV is lower in case of the MF scheme, the returns are marginally better.
