Money
Can a high sum-assured Ulip offer better cover, returns?
Summary
- These insurance products return various charges if you stick to the policy for the long-term.
Most insurance policies that mix life insurance and investment offer neither adequate life cover nor good investment returns. Think Ulips, or unit- linked insurance plans. Financial experts say, consumers are better off buying separate term insurance which has low premiums and also investing in a good mutual fund (MF) simultaneously. Over the past few years though, insurance companies have come up with new plans that provide term insurance cover with a higher sum assured in combination with Ulips that generate market-linked returns. But do these insurance products make the cut?
“Pure term plans exist but we cannot ignore customers asking for the survival benefit. High sum-assured Ulips offer this in the best way possible," says Piyush Trivedi, joint president and head, Alternate Channel & Digital Channel, Kotak Mahindra Life Insurance Co.
The sum assured (SA) multiple in TULIPs could be 100-200 times of the annual premium, depending on the combination of the policyholder’s age, policy term and premium payment term). For Ulips, the returns are generally 10 times of the annual premium.
There are additional benefits if you stick to the policy for the long term. For example, return of mortality charges, return of fund management charges, refund of premium allocation charges, and loyalty additions, among others. “These are fairly new products. Tata AIA Life Insurance (Tata Smart Sampoorn Raksha) was the first one to launch it in 2021," says Vivek Jain, Head of Investments at Policybazaar. Other such plans include HDFC Smart Protect, Bajaj Invest Protect Goal, Max Smart Flexi Protect Solution and ICICI Pru Protect N Gain. Kotak Life Insurance is the latest entrant and launched its TULIP on 20 December.
These plans come with premium flexibility. A 30-year-old or a 35-year-old can both buy a high SA policy at the same premium amount. The maturity benefit will vary as per the combination of age, SA multiple, investment value, and the policy term. While other insurers haven’t specified any lower limit in the premium, the Kotak TULIP has fixed it at ₹1 lakh per annum.
“The Ulip premium has two elements—the death benefit and the investment value. Customers can choose their own multiple for the death benefit. The remaining portion gets invested in the underlying fund net of charges. Most plans in the market offer a multiple of 100x of the annual premium. Younger people in our policy can have a multiple of 170x," says Madhu Burugupalli, senior executive vice president and head of products, Bajaj Allianz Life Insurance.
How this new product fares
When it comes to an investment-linked product, financial advisers tell their clients to compare it with a combination of a term plan and an equity mutual fund. The idea is to buy a low premium term plan and invest the premium differential in an equity MFs.
Data from Kotak Life Insurance shows that a 35-year-old paying a premium of ₹1 lakh for 10 years in a 40-year policy term will get ₹70 lakh on maturity, considering investment growth at 8%. The term plan for this person can be bought at a premium of ₹46,138. The premium differential of ₹53,862 can be invested in an equity mutual fund. Assuming an expense ratio of 0.8% and compound annual growth rate of 8%, the mutual fund will accumulate ₹63.84 lakh, Kotak data shows.
“TULIP works better than a MF and term insurance combination (MF+term) for a longer tenure when compared at the same investment value and horizon because of loyalty additions on maturity," says Trivedi of Kotak Life. In the short to medium term, however, MF returns will be better until refund of different charges gets deployed," he says. However, this argument rests on the expense ratio being 0.8%. A Nifty50 direct-growth Index Fund can have an expense ratio of as low as 0.1%.
Vivek Banka, founder, GoalTeller, analysed Bajaj Invest Protect Goal, a similar product. If a 30-year-old pays ₹1 lakh annual premium in a 10-year premium payment policy and having a policy term of 40 years, she will receive ₹76.93 lakh on maturity (investment growth assumed at 8%). The internal rate of return (IRR) will come in at 5.87% due to different charges getting deducted from the investment value such as fund management charges, policy administration charges, and premium allocation charges, among others.
Here’s the alternative. Consider a term cover at ₹15,000 annual premium for the same policy term and premium payment term, and the premium differential of ₹85,000 each year is invested in a Nifty50 direct-growth index fund for 10 years. No fresh additions will be made in the following years.This will lead to a corpus of ₹92.67 lakh, adjusting for an expense ratio of 0.1% and equity long-term capital gains tax. The IRR will then be 7.11%. “If one chooses a direct-growth plan in a large-cap equity fund, the MF+term combination will yield better returns," says Banka.
Do note that your money gets locked in Ulips in the initial five years. MFs provide better liquidity. While partial withdrawals are allowed in Ulips after 5 years, the fund value will be lower than what you could have accumulated in an equity MF.c
The catch in TULIPs
The return of mortality, premium allocation and fund management charges, along with loyalty benefits, should ideally add to the IRR of TULIPs. But that is where the concept of reduction in yield (RIY) comes into play. RIY is the return differential between what the underlying fund of a Ulip earns (insurers assume it at 4% and 8% in benefit illustrations) and what a policyholder receives net of charges. Insurance regulator Irdai has specified that this difference cannot be more than 4% at the end of the fifth policy year, 3% at the end of the tentth policy year and 2.25% at the end of the fifteenth policy year and beyond. Due to various charges, the RIY goes above 3% in most Ulips. It means if the underlying fund earns 8%, net returns for policyholders go below 5%. Insurers refund mortality, premium allocation and other charges to perk up the net return so that they meet the Irdai-specified RIY limit. That said, one should not get lured by these refunds, say experts.
Sumit Ramani, actuary and co-founder, ProtectMeWell.com says the combination of term + MF is any day better than a high SA Ulip from an efficient use of money perspective. However, the underwriting norms are stricter in term plans.
“If you are unable to get a reasonable term cover due to medical conditions, choose a high SA policy that offers you the highest SA multiple. Refunds of different charges shouldn’t be the sole driver for making the decision," he says.
Jain of Policybazaar says TULIP could be a replacement for Trop (term with return of premium) because, it being a market-linked product, policyholders can fetch better returns on maturity in the former.
Trop is a type of a term plan in which total premiums that you have paid during the premium payment term get refunded at maturity if you live through the policy period.
“For example, Max Life TROP for a 35-year-old has a premium of ₹30,734 for ₹1 crore coverage. The premium is ₹50,762 for Max Life high SA ULIP policy. The former will fetch just ₹8.5 lakh on maturity, while the latter will get ₹24.6 lakh," he says.
