New Ulips suit passive investors but mutual funds remain a better option

In mutual funds, if you have a systematic investment plan, you can stop it anytime and get back the entire fund value

Insurers are giving unit-linked insurance plans (Ulips) a makeover. In their new avatar, costs have been reduced so much that they can compete with direct mutual funds (MFs). The insured only pays fund management and mortality charges. There is no policy administration charge, policy allocation charge or fund switching fee, all of which eat into returns.

Insurers are launching these competitive products to get a slice of the growing pie of retail investors’ money going into the stock markets. “In the past few years, investment in stock markets via MFs has grown manifold. But, investors’ participation through Ulips has been steady,” says Santosh Agarwal, head of life insurance, Policybazaar.com. Agarwal adds that low-cost Ulips can give insurers an opportunity to cross-sell or up-sell other insurance products, another reason for keeping costs low. 

The third wave of Ulips: Edelweiss Tokio Life Insurance has launched Wealth Plus and Max Life Insurance has received the Insurance Regulatory and Development Authority of India’s (Irdai’s) nod to launch Max Life Online Savings Plan. A few other life insurance companies have also filed applications to launch similar low-cost plans.

Source: Policybazaar

Apart from low cost, these plans let investors switch from one fund to another, as many times as they want, without charging any fee. Investors can also choose strategies like life-stage investing, wherein the money is automatically shifted from equities to debt as one gets closer to end of term. Switching from one fund to another is tax-free in insurance policies. “The product is designed for individuals who are well-informed, understand finances and prefer to take decisions on their own, rather than consulting an agent. Also, the funds we are offering are existing ones that have a track record,” says Manik Nangia, director–marketing and chief digital officer, Max Life Insurance.

To make its product more appealing, Edelweiss Tokio says it will contribute to the investor’s funds. It will add one per cent, three per cent, five per cent and seven per cent of the premium in years one to five, six to 10, 11 to 15, and 16 to 20, respectively. “Apart from being a retention tool, adding money to investors’ funds also helps them create a corpus that benefits from the power of compounding,” says Deepak Mittal, managing director and chief executive officer, Edelweiss Tokio Life.

Suits passive investors: Financial planners suggest that to gain the most from his investment, an individual must review his portfolio at least once a year. If the investment is not yielding the desired results, he should shift to other products. But, for those who don’t want to do this, the new low-cost Ulips can come in handy.

In addition, a customer can get tax benefit on investment. Also, there’s no tax on accrual or on withdrawal. There’s also an option to withdraw partially from the funds after the completion of a certain number of years. These withdrawals also don’t attract any tax.

Active investors should opt for mutual funds: Ulips come with the flexibility to switch between plans and strategies, not many investors do actively, according to financial planners. Also, even if you want to switch, you can only do so between the funds offered by the same insurance company. “When an investor is reviewing his portfolio, in case of MFs, he can shift from the scheme of one fund house to another if he is unhappy with its performance. Ulips don’t offer this option,” says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

In MFs, if you have a systematic investment plan, you can stop it anytime and get back the entire fund value. In case of Ulips, the investor has to keep paying the premium for at least five years to get a considerable portion of his fund value back. “In case there is a job loss or a situation where the investor needs to withdraw money urgently, he would not get the entire fund value if he has not continued the policy for a certain number of years,” says Suresh Sadagopan, founder, Ladder 7 Financial Services. Also, in Ulips a person has to opt for a certain term. If he surrenders the plan before completing the term, the insurer deducts a portion of the fund value and gives back the remaining money. 

Sadagopan says investors shouldn’t opt for these Ulips only because of their low costs.