Ten years back, buying a Unit-linked Insurance Plan (Ulip) was most probably a bad deal for the investor. High expenses, huge commissions and opaque structures and policies did not serve the investor’s interest. But times have changed. Nudged by insurance regulator Insurance Regulatory and Development Authority of India(Irdai), insurance firms have cleaned up their Ulip act. Today, the market is witnessing a rise of a new kind of Ulips - N-Ulips, an acronym for new-age Ulips. Designed for the savvy and long-term customer who buys the product online, the latest avatar of Ulips have lower cost, are transparent about charges and some even give insurance virtually free. DNA Money takes a look at these new-age Ulips and gives you a check-list that will help you buy the right product.

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Deconstructing N-Ulips
An Ulip is a combination product. It combines insurance with investment. A large part of the money you pay to the insurance company in an Ulip goes into the investment corpus, while a small portion is for insurance. The investment part, like a mutual fund, is about growing your wealth in the way you have chosen. The insurance part is small. New-age Ulips offer a cover of 7-10 times annualised premium (regular premium and single premium).

Insurance cover is the not the reason to buy a new-age Ulip. It is better to buy term insurance, which gives you much larger coverage and is cheaper. The real reason to buy a new age Ulip is cost of investment and market-linked returns. On this front, new -age Ulips have shown some promise. Plus, with Long-Term Capital Gain (LTCG) tax on equity-oriented MFs coming into force, given similar fund performance, returns from Ulips would be better than MFs.

From a purely investment perspective, new-age Ulip investors must consider the fund management charges. We studied a range of new-age Ulips like SBI Life e-Wealth, HDFC Click2Invest, Edelweiss Tokio Life Wealth Plus, Aegon Life iMaximize, Max Life’s Online Savings, PNB Metlife’s Mera Wealth. All new-age Ulips offer between two to eight fund options (large cap, mid cap, multi cap, balanced, debt, etc). Usually, the fund management charges for equity funds in Ulips are between 1-1.35%, while debt-focussed fund options are cheaper. These costs are comparable to mutual funds.

Some companies offer features like loyalty addition and fund/wealth booster, which will enhance the returns, provided the investors stays on for a fixed period.

P Nandagopal, former CEO IndiaFirst Life Insurance and founder & chief mentor at Insurance Inbox said: “It is fair to make a comparison between the new age Ulips and MFs especially if the term of investment is longer. The returns in the yield of Ulips is comparable to MF with additional benefit, which is the mortality cover and the option to shift between asset classes without any fees. But in MF if you move between asset classes there is a fee. In Ulip there is no fee.”

Beyond fund management charge, new-age Ulips also levy a variety of charges. While most new-age Ulips have zero premium allocation charge and zero policy administration charge, some products charge a fixed sum as policy administration charge (Rs 25-200 per month). Then, there are switching charges and partial withdrawal charges. Many of the competing new-age Ulip products have a limited number of free switches and partial withdrawals. Once this free limit is crossed, you may have to pay Rs 100-250 per withdrawal/switch (the rates could be lower when done on the company’s portal). Lastly, there are surrender and discontinuance charges (up to Rs 6,000) apply. This is pretty much standard across most lower-cost Ulips.

Free insurance
At least two new-age Ulips are virtually offering free of cost insurance. The free insurance works in form Return of Mortality Charge (ROMC). The cost of the insurance cover provided by Ulips is deducted as mortality charge. Canara HSBC Oriental Bank of Commerce Life Insurance’s ‘Invest4G’ Ulip and Bajaj Allianz Life’s ‘Goal Assure’ do this. The amount equal to the total of all the mortality charges deducted during the policy term are added to the fund value at the maturity date, provided all due premiums have been received till the maturity date. Do remember the return of mortality charge feature is only available under benefit option 1 (Life Option) for Invest4G and is not available under the other two benefit options.

On why their Ulip returns the mortality charge, Tarun Chugh, MD and CEO, Bajaj Allianz Life Insurance said: “India is a young country. The median age of Indians is 29 years. The fact is that people looking at ‘what’s in it for me’, more than ‘what’s in it for somebody else in the family, when I am not there’.”

Do note that fund-house (MFs) also offer a form of free insurance with SIPs (Systematic Investment Plans). Aditya Birla Sun Life, Reliance and ICICI Prudential provide a group life insurance cover for eligible SIP investments in MF products for at least three years. The insurance cover in MFs is 100-120 times monthly SIP installment, with Rs 25-50 lakh per investor cap depending on the fund-house.

Ulip downside
Ulips today are not liable to LTCG tax like an equity fund. But, many feel that tax advantage alone doesn’t make Ulips attractive. MFs are transparent, they are liquid, and they are low on cost. Also, you can move your money around if the investment is not doing well. Liquidity in Ulips is low. Of course, there may be some Ulips that would be more advantageous but that may be proven over time. Today, MFs have a strong track record built over time.

Insurance companies feel investors must give new-age Ulips a chance, as these products have built to provide more value. Anuj Mathur, MD & CEO, Canara HSBC Oriental Bank of Commerce Life Insurance Company said: “The product philosophy we follow is to focus on customer needs and design propositions with customer insights and extensive market research. Our aim always has been that our proposition to customer must be market competitive, typically top quartile for target customer segments which provides fair value exchange.”

As new-age Ulips build a longer track record of wealth creation across market cycles, they may compete much more strongly for the investment wallet share. 

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“Ulips are good if you are investing for the long term. Long term is anything beyond five years. You should also have risk appetite, which is the ability to withstand losses in face of capital loss,’’ Nandagopal said.

Source: DNA Money