Look beyond returns for ULIPs

Unit linked insurances plans (Ulips) as a product has undergone a series of changes. Prior to 2010 Ulips was the bad apple in the basket with charges soaring up to almost 7-8% and hugely mis-sold. The popularity went down because of the front load costs. The regulator realising the injustice in the way the product is offered to the customers clamped down on the product and increased the lock-in period to five years and placed a limit on the charges in 2010. The net reduction in yield for policies with term less than or equal to 10 years shall not be more than 3% at maturity and for policies with term above 10 years 2.25%. Hence the total charges cannot exceed 3%. “Currently there are about 100 plans and over 500 fund options,” said Kapil Mehta, founder, SecureNow.in. Ulips have two components—insurance and investment. “Because of the life insurance component Ulips have mortality charges,” said Anik Jain, co-founder and chief executive officer, Symbo Insurance, a Mumbai-based insurance broker. The mutual fund component takes care of the returns of Ulip plans. “After the various charges, Ulips start operating like a mutual fund. It is straight forward. The NAV of the funds are declared every day. Your returns are basically the difference between the NAV of the present day and NAV during the entry point,” said Jain.

For example if the NAV was Rs 100 when you entered the plan and the NAV when you are exiting is Rs 110, your returns are 10%. “Insurers word it differently but primarily we have three kinds of fund options: equity, debt and balanced,” said Jain. Your returns will depend on which kind of fund option you choose. “There will be around 8 to 10 funds depending on the type of fund and returns vary accordingly. Funds in a Ulip plan can be large-, mid- multi- or small-cap fund. Mid-cap funds on an average had given 12% return while bond funds gave around 8% returns, for a five-year period,” said Ayush Mittal, business head, investment at Policybazaar.com. Hence returns vary according to the fund option you choose. According to Morningstar, equity Ulips have given returns of 4.1%, large-cap 9.85%, mid-cap 12.31% and multi-cap funds 7.05% over a five-year period as per data in August. Ulips also allow you to switch between the fund options however switching also carries a few charges.

“It is better if Ulip returns are monitored for a period of five years or more considering there is also a lock-in period of five years and it gains stability over a longer term,” said Mittal. However, mutual fund schemes underwent recategorisation last year under the directives of the markets regulator. “This has little or no impact on Ulips as the product is governed by IRDAI. Also, regardless of the amount you invest, the insurance regulator has already capped the charges and net reduction in yield for the customers, so the returns or its comparison does get impacted any way,” said DheerajSehgal, chief institutional business officer, Bajaj Allianz Life Insurance. Even though they are capped, there are many charges. “There are quite a few charges in Ulips: allocation charges, admin charges, mortality charges, fund management charges and mortality charges,” said Jain.

Since the charges are capped are returns the one-size-fits-all parameter to invest in Ulips? “You should also run a check on the corpus available with you, your goals, understanding of the markets and risk appetite,” said Sehgal. Since there is a five-year lock-in period, assessing your own financial health and goals becomes essential because insurers also charge you for withdrawing your plan before the lock-in period ends. “Ulips are meant for long term investments only,” said Mittal. The decision to invest also depends on what kind of investor you are. Assessing your own risk profile is also important because the risk reward ratio for Ulips is high so if you are a risk-averse investor, you may want to avoid the product.

First Published: Aug 19, 2019 12:11 IST