New, reworked Ulips may not offer better returns
Many insurers have reworked Ulip charges, but the impact on returns may not be much.
At least four life insurance companies recently launched unit-linked insurance plans, or Ulips, without allocation charge. These are Future Generali Pramukh Nivesh, Bajaj Allianz Guaranteed Maturity Insurance Plan, Bharti AXA Future Invest and Kotak Invest Maxima. This, the companies say, allows them to invest all the investor's money at the start of the policy.
Premium allocation charge is deducted from the premium to cover initial expenses such as distributor's fee and underwriting cost. The amount left is invested according to the scheme's mandate.
"A zero premium allocation charge means 100 per cent premium is allocated to the fund and more units are allocated at the start of the policy," says Rituraj Bhattacharjee, head, market management, Bajaj Allianz Life Insurance.
WHAT CHANGES NOW?
Usually, in a Ulip, there are four fees-premium allocation, policy administration, mortality (for providing insurance) and fund management (for managing the investment).
While the premium allocation fee is deducted upfront, policy administration and mortality charges are deducted every month by cancelling the units held by investors. The fund management fee is levied on the fund value arrived at after adjusting the earlier mentioned charges.
Let's assume a person invests Rs 3,000 every month in a Ulip with a 3 per cent premium allocation charge. This means Rs 90 is deducted upfront and the rest Rs 2,910 buys units of the fund. Suppose the net asset value, or NAV, of the fund on the day the units are bought, say the 10th of the month, is Rs 17.2402. The investor will receive 168.7916 units. On 25th of the month, the fund will deduct Rs 130.40 as monthly charge (including policy administration and mortality fees) by cancelling 7.2725 units at the day's NAV of Rs 17.9302. The fund value after monthly charges will come out to Rs 2,896.
If there are no premium allocation charges and other conditions, including charges and dates, remain the same, the investor will get 174.0119 units (instead of 168.7916 in the previous case). On 25th, the insurer will cancel 7.4746 units as monthly charges, leaving 166.7094 units for the investor. The fund value will thus be Rs 2,989, Rs 93 more than in the previous case.
MERE REPACKAGING?
However, there is a catch. While most Ulips mentioned above do not have any allocation fee, the companies have increased the policy administration charge, almost 'neutralising' the impact on the net yield.
Andrew Cartwright, appointed actuary, Kotak Life Insurance, says they are charging a higher policy administration charge in plans where there is no premium allocation fee. However, he says, "Investors will gain as all their money will be now invested."
In Kotak Invest Maxima, the policy administration fee is 0.6 per cent of the annual premium per month, subject to a cap of Rs 6,000 per year. Compare this with Kotak Ace Investment, which charges 6 per cent annual premium as allocation charge in the first two policy years, 4 per cent in the three-five year period and 2 per cent from 6th year onwards. The policy administration fee is 0.1 per cent of the annual premium every month, one-sixth of that in Kotak Invest Maxima.
Cartwright admits the removal of the allocation charge is 'repackaging', with impact on the overall yield being very small.
If the NAV of the fund grows at 10 per cent annually, the net yield on investment made by an investor in Kotak Invest Maxima after 10 years will be 7.77 per cent compared to 7.63 per cent in Kotak Ace Investment.
Except Future Generali Pramukh Nivesh, the other earlier-mentioned schemes levy a higher policy administration fee than similar plans with allocation charge offered by the same company.
Deepak Sood, MD & CEO, Future Generali India Life Insurance, says, "No commission or other remuneration is paid to agents or other distributors under this plan. It is generally sold directly."
The economics of Ulips, though, is such that it is difficult for insurers to remove the allocation charge without increasing other charges.
Kamalji Sahay, MD and CEO, Star Union Dai-ichi Life Insurance, says, "Technically, there cannot be a Ulip without allocation charge because the company incurs acquisition cost that has to be funded out of the premium collected from policy-holders."
Even as insurers try hard to dress up Ulips as investor-friendly products, financial planners are not very sanguine about their ability to offer a proper life cover.
Summet Vaid, CEO and founder, Ffreedom Financial Planner, says, with or witout allocation charges, a product that mixes investment with insurance promotes underinsurance is not ideal for people.
Ulips do exactly that!
Premium allocation charge is deducted from the premium to cover initial expenses such as distributor's fee and underwriting cost. The amount left is invested according to the scheme's mandate.
"A zero premium allocation charge means 100 per cent premium is allocated to the fund and more units are allocated at the start of the policy," says Rituraj Bhattacharjee, head, market management, Bajaj Allianz Life Insurance.
WHAT CHANGES NOW?
Usually, in a Ulip, there are four fees-premium allocation, policy administration, mortality (for providing insurance) and fund management (for managing the investment).
While the premium allocation fee is deducted upfront, policy administration and mortality charges are deducted every month by cancelling the units held by investors. The fund management fee is levied on the fund value arrived at after adjusting the earlier mentioned charges.
Let's assume a person invests Rs 3,000 every month in a Ulip with a 3 per cent premium allocation charge. This means Rs 90 is deducted upfront and the rest Rs 2,910 buys units of the fund. Suppose the net asset value, or NAV, of the fund on the day the units are bought, say the 10th of the month, is Rs 17.2402. The investor will receive 168.7916 units. On 25th of the month, the fund will deduct Rs 130.40 as monthly charge (including policy administration and mortality fees) by cancelling 7.2725 units at the day's NAV of Rs 17.9302. The fund value after monthly charges will come out to Rs 2,896.
If there are no premium allocation charges and other conditions, including charges and dates, remain the same, the investor will get 174.0119 units (instead of 168.7916 in the previous case). On 25th, the insurer will cancel 7.4746 units as monthly charges, leaving 166.7094 units for the investor. The fund value will thus be Rs 2,989, Rs 93 more than in the previous case.
MERE REPACKAGING?
However, there is a catch. While most Ulips mentioned above do not have any allocation fee, the companies have increased the policy administration charge, almost 'neutralising' the impact on the net yield.
Andrew Cartwright, appointed actuary, Kotak Life Insurance, says they are charging a higher policy administration charge in plans where there is no premium allocation fee. However, he says, "Investors will gain as all their money will be now invested."
In Kotak Invest Maxima, the policy administration fee is 0.6 per cent of the annual premium per month, subject to a cap of Rs 6,000 per year. Compare this with Kotak Ace Investment, which charges 6 per cent annual premium as allocation charge in the first two policy years, 4 per cent in the three-five year period and 2 per cent from 6th year onwards. The policy administration fee is 0.1 per cent of the annual premium every month, one-sixth of that in Kotak Invest Maxima.
Cartwright admits the removal of the allocation charge is 'repackaging', with impact on the overall yield being very small.
If the NAV of the fund grows at 10 per cent annually, the net yield on investment made by an investor in Kotak Invest Maxima after 10 years will be 7.77 per cent compared to 7.63 per cent in Kotak Ace Investment.
Except Future Generali Pramukh Nivesh, the other earlier-mentioned schemes levy a higher policy administration fee than similar plans with allocation charge offered by the same company.
Deepak Sood, MD & CEO, Future Generali India Life Insurance, says, "No commission or other remuneration is paid to agents or other distributors under this plan. It is generally sold directly."
The economics of Ulips, though, is such that it is difficult for insurers to remove the allocation charge without increasing other charges.
Kamalji Sahay, MD and CEO, Star Union Dai-ichi Life Insurance, says, "Technically, there cannot be a Ulip without allocation charge because the company incurs acquisition cost that has to be funded out of the premium collected from policy-holders."
Even as insurers try hard to dress up Ulips as investor-friendly products, financial planners are not very sanguine about their ability to offer a proper life cover.
Summet Vaid, CEO and founder, Ffreedom Financial Planner, says, with or witout allocation charges, a product that mixes investment with insurance promotes underinsurance is not ideal for people.
Ulips do exactly that!
