New Delhi: With unit-linked insurance plans (Ulips) caught in the crossfire between the two regulators—Securities and Exchange Board of India, and Insurance Regulatory and Development Authority—insurers are now getting innovative with traditional plans.
While keeping the old mandate of having minimum exposure to equities intact, new traditional insurance-cum-investment plans are aping Ulips in more ways than one.
Insurers started with offering guarantees instead of bonuses (related to the company’s performance). Then the way of choosing the sum assured, or the money you get at the time of maturity, changed. Earlier, you chose a sum assured, according to which the premium was fixed. Now, like in the case of Ulips, you choose the premium you can afford and the policy will decide the sum assured for you.
A new offering, Reliance Life Traditional Investment Insurance Plan, has gone a step ahead to completely internalize the essence of Ulips. In this policy, the charges are clearly spelt out, the sum assured is based on the premiums you pay and your fund value increases by a rate that the insurer declares every year.
No wonder then, you need to exercise the same caution and care you do while buying Ulips in decoding the benefits of the new policy. In popular jargon, this new plan is called the universal life insurance plan.
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Before getting invested or used for the insurance component, a part of your premium first goes into meeting the premium allocation charge. the remaining money gets invested. From this investment fund, other charges, such as cost of insurance and administration charges, get deducted.
Your money grows at the rate declared by the company every year. For instance, for FY11, the rate is 7.75%. Though this rate will keep changing every year, it can’t dip below the savings account rate offered by banks—currently 3.5%.
Says Malay Ghosh, executive director and president, Reliance Life Insurance Co. Ltd: “Universal life insurance plans fall somewhere between traditional plans and Ulips. We follow investment guidelines for traditional products and, therefore, the exposure to equities is restricted to 20%. However, on the basis of our investment and how the fund performs, we will declare an interest rate at the beginning of every financial year which will be the rate at which the fund will grow for that financial year.”
The insurance cover is fixed at 7.5 times the premium that you pay. However, once the fund value—this policy calls it the accumulation account—is more than the sum assured, your beneficiary gets the fund value on your death.
This feature is similar to the one applicable to type I Ulips, which pay the higher of the sum assured and the fund value as death benefit.
Mint Money take
This may not be the best policy for you. The charges in the policy drag your returns down by about 1-2 percentage points depending on your age and the tenor that you choose.
For instance, a 30-year-old investing till 60 years of age gets a return of about 4.52%, assuming the fund grows at 6% (we have taken 6% since the fund’s exposure to equities is minimal). Assuming the fund grew at 7.75% (the present rate of return) in the above example, your net return would come to around 6.27%. At 7.75%, the returns can be compared with what a fixed deposit would give. Therefore, it could be an option for a risk-averse investor. But remember that the return is 7.75% only for this year and can dip to as low as 3.5%. Your final returns at the time of maturity would depend on what the company declares every year. That is a risk that you need to be ready to take.