Kolkata-based Prakriti Ojha’s insurance agent called her last week to inform about a new, safe product giving assured returns, called a universal life plan (ULP). The 25-year-old is excited about the product, which guarantees returns with insurance.
But financial planners are not. Their argument: ULPs are a combination of traditional endowment plans and unit-linked insurance plans (Ulips), leading to high cost with limited returns.
“When Ulips invested in equities, one took five-six years to recover his/her money. When will I recover my money by investing in debt products? This is worse than Ulips,” said Katik Jhaveri, director, Transcend Consulting. Financial planners reiterate term plans are the best option for insurance needs and one should save through pure investment products.
In the past few months, insurers are focusing on such hybrid products as ULPs because the Insurance Regulatory and Development Authority has tightened norms for Ulips, making them less lucrative for companies. “With increasing pricing pressures on Ulips, both distributors and insurers are finding that pushing traditional plans and ULPs is safer, as well as bankable. In fact, many companies who do not have ULPs in their portfolio are likely to introduce them soon,” said an executive of a life insurance company.
An ULP functions like a Ulip in terms of costs, while it invests like a traditional plan.
Returns
As ULPs are fixed income-based products, returns are not market-linked. The sum assured is also not very high. The two existing products — Max New York Life Secure Dreams and Reliance Life Investment Insurance Plan — offer a sum assured of 10-20 times and seven-and-a-half times the first-year premium, respectively.
The insurance company declares an interest rate, called declared interest credit to your account value (or fund value in case of Ulips). Ulips being market-related, the returns are not specified.
The declared interest credit is generally a function of returns from the fund manager’s fixed income products, which are mostly government securities and highly rated corporate papers.
Also, there is a minimum guaranteed rate. “The minimum guaranteed value is the lowest possible rate of interest or return the insurance company commits to pay on your investments” said Manik Nangia, senior vice-president & head (product management), Max New York Life Insurance. At present, Max New York Life Insurance was paying 6.5 per cent annually, he added. However, this rate is subject to revision. This rate cannot fall below the savings bank account rate of 3.5 per cent. However, financial planners say fixed deposits (FDs), public provident fund and AAA-rated corporate FDs are better paying options compared to ULPs’ guaranteed return of 3.5 per cent.
As for the term policy, insurance companies declare bonuses on ULPs on a regular basis, mostly quarterly. Additional rider benefits are also available with ULPs, for an extra premium.
Costs
But costs are high. Consider Reliance Life Investment Insurance Plan. For a policy of 15 years, a 26-year-old paying a premium of Rs 15,000 a year will get a sum assured of Rs 1.12 lakh. The costs: Rs 4,500, or 30 per cent, as premium allocation charge (PAC) in the first year. The PAC will come down to five per cent, or Rs 225, for the next three years. In addition, Rs 19, or 0.125 per cent, is the monthly policy administrative fee and up to two per cent is the investment spread (margin deducted from actual returns earned on investments to maintain the guaranteed minimum value reserve).
If one were to invest the same amount in a Ulip, say Reliance Life-Super Invest Assure Plus Basic Plan, the cost will be higher by 15 per cent in the first year itself. The first year’s PAC would be Rs 6,750 or 45 per cent. The PAC falls to five per cent a year for the next three years. The monthly administrative fee is Rs 40 and the fund management fee will range between 1.25-1.35 per cent of the fund value.
An endowment policy, on the other hand, gives a higher sum assured for similar costs and returns. In case of Reliance Endowment Plan, for a sum assured of Rs 2 lakh, you would pay an annual premium of Rs 13,471. The first year’s charges (commission, underwriting cost, distribution cost and so on) could be in the range of 50-60 per cent of the premium and could go down to 5-10 per cent in the next three years. Returns could be 6-10 per cent.
As far as tax benefits go, ULPs give a tax benefit under Section 10(D) and 80C of the Income Tax Act, as applicable to term life insurance, where proceeds are tax-exempted on maturity.
