Did You Know | Net yield comparison doesn’t work in Ulips

Did You Know | Net yield comparison doesn’t work in Ulips

How do you compare investment products? An immediate answer that comes to mind is by comparing the net yield for the products. Net yield as the name suggests is the final return after factoring in the costs in a product. So if two products are assumed to have the same growth rate, the one with a higher net yield is believed to be better since it has lower costs.

Why net yield comparison doesn’t work?

Can we use the same yardstick while comparing unit-linked insurance plans (Ulips)? The answer is no. Even as Insurance Regulatory and Development Authority (Irda) has mandated that every Ulip sale be accompanied by a benefit illustration that also indicates the net yield on an assumed rate of growth of 6% and 10%, this net yield is not the truest reflection of all the charges in a product. That is because the regulator has allowed the insurers to exclude costs such as mortality costs, service tax and any charges on account of a investment guarantee while calculating the net yield.

But the net yield, which is ideal to compare costs in a product, does not include these charges. We took a look at the illustration of a Ulip. At an assumed growth rate of 10%, the net yield of this product came to 8.24%, however, at the bottom of the illustration was mentioned that the net yield excluded costs such as service tax, education cess, mortality charge and rider charge in its calculation. The year-on-year impact on the fund performance although factors in all these costs. So we took the fund value at the end of 20 years or on maturity and did a quick IRR calculation. The real net yield of this product is 7.96%.

What should you do?

Ideally one should compare the net yield across similar policies and for the same parameters like age, sum assured, premium and investment fund.

For now, since the net yield in the benefit illustration does not factor in all the cost in the policy, we suggest you compare the fund value on maturity. The fund value year on year takes into account all the costs.

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