With unit-linked insurance plans (Ulips) stuck in the crossfire between the capital market regulator and the insurance regulator, it may take some time before your agent pushes another Ulip to you. Insurers are mum about any new launches in the Ulip space, but some have gone back to new variants of traditional products (insurance-cum-investment policies that invest mostly in debt products and are not as transparent as Ulips).
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However, despite the tweaks, the two new traditional plans launched recently are still marred by the problems of returns and transparency.
Birla Sun Life Bachat Endowment Plan
This is an endowment plan that offers to return your premium on maturity along with two kinds of freebie additions.
One is called the Bachat Addition Rate, which is declared every year. You get additions equal to the Bachat Rate multiplied by the premiums collected so far. The rate varies according to the premium you choose. For instance, the rate for this fiscal year declared for a monthly premium of Rs5,000 is 5.50%. So, 5.50% multiplied by 60,000 (annual premium), or Rs3,300, gets added and is guaranteed on maturity. These additions work on the principle of simple interest as they get added only on the premiums paid and not on the accumulated value (premium + Bachat additions in earlier years).
The second is a loyalty addition that increases as you spend more years in the policy. These additions happen on top of the Bachat additions.
The policy comes for a single tenure of 20 years and you need to stay invested for at least 10 years to enjoy any additional benefits. Assuming a Bachat Rate of 5.50% for an annual premium of Rs60,000, the policy returns 6.53%. Compared with a fixed deposit, a 6.53% return may not be that bad, but remember that 5.50% is not the guaranteed rate. Your final returns would depend on the rate the policy declares every year.
Insurance: But this plan falls short in catering to your insurance needs. Depending on your age, you can take a fixed cover up to 180 times the monthly premium. So, while a 30-year-old will get Rs9 lakh as sum assured on a monthly premium of Rs5,000 (annual premium of Rs60,000) a 45-year-old will get a sum assured of only Rs6 lakh for the same premium amount. On death, the sum assured or the premiums paid till then, whichever is higher, is paid to the nominee.
Compare this with a term plan, which will give you the same cover for a fraction of this premium: A 35-year-old will get a Rs9 lakh cover for just Rs3,167 over a term of 20 years. Invest the difference in, say, an 8% Public Provident Fund (PPF), a guaranteed debt product, and you would be able to better the return by one percentage point.
DLF Pramerica Dhan Suraksha
This is a money-back plan, which fails terribly on both investment and insurance. You buy this policy with a sum assured in mind. Depending on the sum assured you choose, the policy will ask you to pay a premium. At the end of every five years, the policy will pay you 15% of the sum assured as money-back. On maturity, you will get the balance sum assured along with a guaranteed addition of Rs100 per Rs1,000 of the sum assured. This gets added to the sum assured and bumps it up every year. However, the 15% money-back is calculated on the basic sum assured.
For a 35-year-old looking for a sum assured of Rs10 lakh for 20 years, the premium to be paid would come to Rs1.11 lakh. Compare this with a term plan, where you will have to pay around Rs3,465 to cover a 35-year-old for the same amount and for the same duration. Even though the sum assured increases by about Rs1 lakh every year, the premium that you pay is way out of line.
Skip to investment and it lacks there too. If you take the above example, you would get Rs1.5 lakh after every five years and on maturity, Rs25.5 lakh. This means your money would have grown only at 3.22% over 20 years.
Assuming inflation to be at 6%, you lose the value of your money by about 3% every year. Now, compare this with a term plan combined with a PPF and the results are stark. If you bought a term plan and invested the difference in PPF, you make 7.75% on your investment.
The plans are pitched as savings products that enable you to stash away money for future use. But given the fact that the returns don’t even beat the inflation number, what you will get 20 years from now will not be able to purchase you what it can now. You are better off investing in a debt product, such as PPF, while covering yourself with a term plan.
Graphic by Ahmed Raza Khan / Mint