Whole life Ulips: Low cost, life cover, tax-free withdrawals key benefits

They are complicated products. Read the fine print carefully before making a decision

The success of low-cost unit-linked insurance plans has encouraged life insurance companies to extend the concept to retirement savings. In the last one month, five players have introduced products which allow policyholders to create a corpus over a decade or more, and withdraw a fixed amount on a periodic basis (monthly, quarterly or yearly). These products are positioned as insurance products that would provide regular cash flows post-retirement.

Life insurers that are offering whole life Ulips include Bajaj Allianz Longlife Goal, HDFC Life Click2Wealth, Max Life Insurance - Online Savings Plan (Retirement), Canara HSBC Oriental - Invest 4G (Whole Life), and Edelweiss Tokio Life - Wealth Ultima.

Low cost plus life cover: Just like the low-cost Ulips, these retirement plans have done away with policy administration and policy allocation charges, except for Edelweiss Tokio Life which charges both for the first five years. The only charges they have are mortality and fund management fees. “These products also enjoy tax benefit on investment, accrual, and most importantly, on  partial withdrawals,” says Santosh Agarwal, chief business officer, life insurance, Policybazaar.com. The life cover in these policies is offered through a whole life plan. While these Ulips are low on charges, they can be slightly challenging to understand. Insurers have put some conditions in these to encourage long-term savings.

What is a whole life Ulip? A whole life plan means the cover is offered until the policyholder attains 100 years. But there’s a formula to calculate the sum assured. It’s 70 minus age of the individual divided by two. If the person is 40-year-old, the sum assured will be 15 times (70-40/2) the annual premium. Insurers offer a minimum sum assured of 10 times the yearly premium so that policyholders get the tax benefit on withdrawals. These are also type-I Ulips, which means the individual or his nominee gets higher of the sum assured or the fund value on maturity or on death.

Critical conditions: Since the basic idea is to build a corpus to provide cash flows, insurers have certain conditions. In most of the plans, the policyholder has to opt for a premium paying term of 10 years or more. “This will not only build a corpus but also reduce the mortality charges. In such plans, insurers don’t charge mortality if the fund value is more than the sum assured,” says Rahul Bajaj, product head, Edelweiss Tokio Life.

Partial withdrawals are allowed from the eleventh year onwards, and most insurers don’t allow withdrawal of more than 12 per cent in a year. Max Life is the only company which allows withdrawal up to 50 per cent of prevailing fund value, spread over two transactions in a year. “The restriction on withdrawal is to ensure that the fund value doesn’t go below the sum assured. If that happens, the insurer will start deducting mortality charges, which increase with age,” says Dheeraj Sehgal, chief distribution officer, institutional, Bajaj Allianz Life. Experts suggest that investors opt for an annual withdrawal of 6 per cent so that the corpus keeps growing, irrespective of market conditions.

Many companies also add some of the charges back into the fund. Bajaj Allianz Life, for example, adds back a portion of mortality charge every five years once the policy completes 10 years. Edelweiss Tokio Life adds units to the fund through loyalty additions, guarantee additions and booster at different intervals. The key benefit of the product is tax-free withdrawal, and the investor can structure the payout based on his needs.

Better than insurance pension plans: There have been hardly any takers for insurance companies' pension products of late. In these, the policyholder can only withdraw one-third of the accumulated corpus. With the remaining two-third corpus, he needs to buy an annuity plan compulsorily. The income earned through an annuity is taxable, and the yields are not attractive at present either.

Retirement plans have shortcomings: “Too many options make them complicated for a lay investor. They are also increasingly getting more complex with greater choice of multiple funds. Many of these are sold directly to individuals online. The investor has to be savvy to opt for the best fit in his overall financial plan,” says Malhar Majumder, partner, Positive Vibes Consulting and Advisory.

In a product like a mutual fund or the National Pension Scheme, an investor has a choice to change the fund house if the scheme has a lacklustre performance. “In the case of Ulips, an investor cannot change the company. The only option that the investor has is to change the fund – he can shift from large-cap to multi-cap or mid and small-cap fund or debt schemes,” says Arnav Pandya, a Mumbai-based financial planner. He also adds that these products impose a long premium paying term.

Other advisors say that before an investor opts for these products he should be clear on some aspects. “The fund management fees in Ulips aren’t similar to expense ratios in mutual funds. The latter is the total fee including distribution, marketing, fund management and others. A fund management fee of 1.35 per cent is not low,” says Deepesh Raghaw, Sebi-registered investment adviser and founder of PersonalFinancePlan. Raghaw also says that the mortality charges in the low-cost Ulips are higher than what is charged in a term plan.