Insurance tip: E-ulips cost less, help build bigger corpus

Old unit-linked insurance plans, or Ulips, came under heavy criticism for having a front-loaded fee structure where 30-40 per cent first-year premium used to be deducted as commission.

However, this commission structure was overhauled in September 2010 with the Insurance Regulatory and Development Authority (Irda) capping commission at 7 per cent of the first-year premium.

The regulator also ordered that other upfront charges, which totalled to as much as 70 per cent of the first-year premium in some cases, be uniformly distributed over the five-year lock-in period. Now, a few insurance companies have gone a step further by removing the commission on sales altogether.

So, if you are net-savvy, the no-commission Ulips that are sold online are a good option for you. They are cheaper and have the potential to earn higher returns.

E-CONVENIENCES
After the popularity of online term plans, which are not only convenient to buy but also cheaper than similar offline products, a few insurance companies have launched online Ulips on which you don't pay any commission. Aegon Religare's iMaximise, Bajaj Allianz's iGainIII and Aviva's Freedom Life Advantage are three such exclusive online products.

There is no major difference between an exclusive online product and that sold by the agent. All features and benefits are the same. The only noticeable difference is the lower charges for online Ulips.

For instance, there is no premium allocation charge if you buy Aegon Religare's online Ulip, iMaximise. However, if you take the off-line route and choose to buy its Future Protection Plus Plan, 4 per cent of the first-year premium is deducted as allocation charge. Though this keeps coming down as the policy progresses (around 3 per cent up to the 5th year, 2 per cent from 6th year to 10th year and 1 per cent from 11th year), it is never nil.

 

Similarly, Bajaj Allianz's e-Ulip, iGain III charges 5 per cent annual premium as allocation charge in the first two years of the policy, while you have to pay double (10 per cent of the premium as allocation charge) if you buy their offline product, Money Secure Plan.

 

"This is because insurers are able to pare their annual premium by 10-15 per cent by saving on intermediary commission," says Gaurav Jain, product manager, Fullerton Securities and Wealth Advisors, a Gurgaon-based wealth management firm.

BIGGER CORPUS
Rules allow insurance companies to deduct 9-10 per cent as premium allocation charge in the first year of the policy from which intermediaries get their cut.

This is reduced over a period (around 7 per cent in 2nd and 3rd years, 5 per cent in 4th and 5th years and 2-3 per cent from 6th year onwards). Similar charges are applicable on other products as well.

Therefore, intermediary commission directly impacts the invested amount.

Zero commission equals less payment. It also means higher allocation of premium to the market. This leads to a larger part of the annual premium being invested, which in turn can translate into higher returns over an extended period.

A comparison between returns from no-commission Ulips available online and those sold by the insurer through agents shows e-Ulips (without intermediary charges) fare much better than the offline plans in the long run. There is a difference of 8.6 per cent and 5.2 per cent in returns from online and offline unit-linked plans of Aviva Life Insurance and Bajaj Allianz, respectively.

Just like online term insurance, investment-linked products bought online are cheaper and more efficient.

"Online Ulips either offer a higher life cover or allocate more units to the buyer. Higher percentage of premium invested means probability of better returns at maturity in comparison to products where buyers have to pay a commission to the intermediary," says Akshay Mehrotra, chief marketing officer, Policybazaar.com.

POSSIBLE SPOILERS
Though a higher percentage of premium is invested in the market, what if the fund you have invested in is not able to perform well? There is always a chance of the benefit getting neutralised if you put your money in a badly managed fund.

"The returns depend on the calibre of the fund house and the calls that it takes in the market. So, if the fund doesn't perform, the higher allocation benefit can get neutralised or even become negative," says Rishi Mehra, co-founder, Bimadeals.com. So, Mehra says, the investor must check the Ulip's fund performance before buying and do not buy just because it is easy on your pocket.

However, Gaurav Jain from Fullerton Securities and Wealth Advisors says, "Even if the fund fails to perform due to volatile market conditions or otherwise, since the amount invested in no-commission plans is higher, the absolute loss will be minimised."

Past data show most insurance companies' funds have been able to perform at least on a par or better than the benchmark stock market index in the long run. Moreover, insurers offer different investment options (equity and debt funds) for consumers to choose from according to their profile and risk-taking capacity.

"Since Ulips are long-term products, customers can simply adopt a 'wheel of life' strategy. That is, in the initial years, the fund can be equity-heavy as market volatility gets evened out in the long run. But as they approach maturity and their capacity to take risk falls, they must gradually move to the debt side," says Satkam Divya, business head, Rupeetalk.com.

Also, not every insurer offers products on the online platform. Besides, most of them are selling only selective products online. So, the choices are limited.

Another obvious disadvantage of buying an online Ulip is that you won't get the agent's assistance at various stages. An agent usually helps in choosing the product, completing paperwork, decoding the policy document and filing claims and acts as a single point of contact between the insurer and you.

While buying online, you will have to handle all this yourself. However, do not get intimidated by the idea of having to make the decision yourself. To encourage online purchases, most insurance companies have comprehensive online tools such as 'chat with an online executive' or 'talk to adviser' option on their websites.

So, if you have problem understanding the fine prints of the policy document or you get stuck at any point, help is just a click away.