Is capital protection in Ulip good enough?

Keep in mind mortality and premium allocation charges. Life cover limited to 10 times the annual premium

Encouraged by the rising equity markets, life insurance companies are once again launching unit-linked plans (Ulips) to attract investors. One such Ulip is Bajaj Allianz Life Principal Gain, launched last week. It assures 101 per cent of premiums paid as return even if the market sees a slowdown. It also offers a guaranteed loyalty addition for those who stay invested till maturity. According to Anuj Agarwal, managing director and chief executive of Bajaj Allianz Life Insurance, the guarantee of the principal amount by protecting the downside is the most important part of the plan.

This product is suitable for those who are slightly conservative because they can take part in the equity markets, without taking too much risk, says Agarwal.

As maturity benefit, a policyholder will receive the fund value as on date (including guaranteed loyalty additions) or guaranteed maturity benefit of 101 per cent of the total premiums paid, whichever is higher. For a 10-year policy term, the guaranteed loyalty addition is four per cent of one year’s premium and for a 15-year policy term, it is 15 per cent of one year’s premium. The minimum annual premium is Rs 35,000 and the highest is Rs 1 lakh. The highest policy term is 15 years. In case of death of the life assured during the policy term, the sum assured or fund value or guaranteed death benefit of 105 per cent of total premiums, whichever is higher, will be paid. The plan comes with the option to take maturity benefit in installments over a five-year period.

Investing in a Ulip is not a value proposition because the cost is high, compared to mutual funds. “Fund management charges may be lower for Ulips compared to mutual funds, but they (Ulips) have premium allocation charges and mortality rates. So, Ulips may not be attractive once all these charges get added,’’ says S Sridharan, head of financial planning and advisory at FundsIndia.com.

Principal Gain invests in two funds – Balanced Equity Fund and Builder Bond Fund. The fund management charge is 1.25 per cent for the Balanced Equity Fund and 0.95 per cent for the Builder Bond Fund. The fund management charge is calculated based on the allocation to the two funds. The discontinuance life policy fund charge is 0.5 per cent, which is applicable in case the policy is discontinued.

The premium allocation charge is 8.5 per cent in the first year, 5.7 per cent from the second to the fifth year, and nil from the sixth year onwards. From the sixth year, there is a premium administration charge of 2.5 per cent of annual premium capped at Rs 6,000. It follows a guaranteed builder portfolio strategy for investment, which decides the allocation in equity and debt funds based on the policy term. For instance, at the beginning of a 15-year policy, the asset allocation is 55 per cent in equity and 45 per cent in debt funds. As the policy term increases, the asset allocation changes in favour of debt and at maturity, it is 100 per cent in debt funds. This will ensure that as the goal approaches (in this case maturity), your money is safer, Agarwal says.

Ulip products tend to catch the attention of investors who are looking for higher returns along with tax-savings investments and benefits of life cover. All these benefits are not offered by the equity markets, says Naval, founder and CEO at PolicyX.com. “But, one should keep in mind that Ulips will not yield returns in the first five to six years. Also, Ulips are complex in terms of charges,” he adds.

Another factor to consider is that life cover is 10 times the annual premium. In this case, the maximum life cover would be Rs 10 lakh, which is not a big amount. So, if you are looking for higher life cover, a better option is to buy a pure-term plan, which is available at a lower premium.

Bimal Samal, director of sales and marketing at Ideal Insurance Brokers, says that such products were available earlier as well. “It is beneficial to the extent that it guarantees the principal amount. If the right kind of fund management is done, it can provide returns with security.”