Investing via insurance plans?

Unit-linked plans are for new investors or those underinsured

Life insurance companies launch many new schemes every year. Therefore, when they launch a scheme, the buzz created by their advertisements convince investors that they can’t afford to miss this opportunity. And more often than not, they tend to buy the policy without knowing the details.

For instance, Life Insurance Corporation of India (LIC) recently launched Samridhi Plus, a unit-linked plan (Ulip) and a highest-NAV guaranteeing scheme. It’s a close-ended one, open till May this year and matures in 10 years time.

Investments in such products are due to either of the following reasons: Surplus money, getting maturity proceeds from another policy or last-minute investments for tax exemption.

In such circumstance, one should step back and think before writing a cheque. Here are a few things you must consider -

Insurance cover
Insurance policy is bought for risk cover. But, most Ulips give poor cover and hence, are sold as investment products. But, you have other investment avenues, too, so why settle for an insurance product. Like, Samridhi Plus’ annual premium, for under 45, is Rs 20,000; insurance cover = Rs 2-4 lakh. This amount doesn’t add much to one’s insurance need and the scheme doesn’t ensure safety from eventualities. 

Investment returns
Ulip are market-linked products and come with risks. Assuming 10 per cent return on Ulips, the real yield will be 8 per cent (net of all charges), that too, not guaranteed.

At 30, if you pay Rs 20,000 as premium for 5 years, you will invest Rs 1 lakh and get Rs 1.73 lakh on maturity after 10 years. Look at other investment options which will give you over 8 per cent in 10 years. Mutual funds are best option with lesser risks.

Investment risk
Many highest NAV guarantee plans use dynamic hedging strategy. The fund manager starts with heavy allocation in equity and slowly moves towards debt, making the product safer with low returns. Compared to equities, these schemes do not give very high returns because it has to maintain a debt holding in order to guarantee returns.
 

ILLUSTRATION - LIC SAMRIDHI PLUS
Features	Single Premium	Regular Premium
Premium Paying Term	NA	5 years
Minimum Sum Assured	1.25x premium	10x Annual Premium
Maximum Sum Assured	5x premium	20x Annual Premium
Minimum Premium	Rs  30,000	Rs 15,000
Maximum Premium	No limit	Rs 1 lakh
Premium Allocation Charges	3.3% of premium	6% in FY; 4.5% remaining
Policy Term	-	10 years
Min/Max Age At Entry	-	8-65
Policy Administration Charges	-	Rs 30 monthly; up 3% yrly
Fund Management Charges	-	0.90% yearly
Guarantee Charges	-	0.40% yearly
Mortality Charges	-	Depends on age

Charges
Investment oriented insurance products may be good for amateurs or those underinsured. But, costs are high and eat into returns. Even after regulatory moves, these are comparatively expensive. There are charges for premium allocation, policy administration, fund management, guarantee and mortality. Instead, mutual funds are much cheaper with zero entry load and even exit load, in some cases.

Taxation
This is the only positives here. Premiums and maturity amount are exempted under Section 80C. But,other products like ELSS and PPF, which can give you similar or higher returns along with the tax benefits.

Therefore, invest in new investment-linked insurance schemes only if you don’t have an another option, not started saving for your future goals.

The writer is a certified financial planner