When stock markets do well, investors want to hitch a ride through various investment products. Everybody wants to get a piece of the action. There was a time, not long ago, when United Linked Insurance Plans or ULIPs were considered as bad investment products due to high charges and fees. Plus, there was a lot of misselling by insurance firms and their agents as well, which drove customers away. Then insurance regulator IRDAI stepped in with reforms in 2010. Market linked products are also dependent on market movement. Though ULIPs were reformed, they lacked the bang and appeal. Also, investors who were once bitten became twice-shy. This is also a time when mutual funds witnessed a rise in popularity. Over the last 12-18 months, a new sub-category of ULIPs have emerged. Call them, new ULIPs or NULIPs. Are these any different or just a marketing gimmick? Let's find out.
On paper, NULIPs seem much different. Life insurance companies claim that NULIPs are extremely cost effective and are comparable to mutual funds. You might not hear a lot about them on TV, newspapers/ magazines or see big hoardings. Many of these NULIPs are sold online. That is a reason why they are better as well. Selling a product through offline channels means higher cost of customer acquisition. So, customers/investors buying these NULIPs online get a much better deal. In some cases, NULIPs also return the insurance cost to the investor, making the insurance practically free. Plus, there are a whole lot of other goodies which can potentially enhance investors’ returns if they remain invested for the long-term.
One must understand why people buy ULIPs. Unit linked insurance plans combine the insurance aspect with investment. You may invest Rs 1 lakh a year in an investment, but if you die at the end of 5 years, all your returns will be limited to the Rs 5 lakh invested. On the other hand, if you buy a pure term insurance policy, you will have to die to realize the benefit! This is why combination products try to merge the best of both worlds. ULIPs were designed to replicate this. They give you reasonable insurance so that if you die in the interim, your financial goal is met with the sum assured. In case you live through, the investments done by the ULIP will ensure you get a neat corpus on maturity.
But ULIPs got it wrong somewhere down the line. Huge commissions were being paid to ULIP agents. This was recovered from investors in the name of exorbitant fees. Thankfully, the NULIPs have done away with most such charges. Do remember that unlike Systematic Investment Plans in tax saving mutual funds, ULIP investors can redeem the entire amount at the end of five years even if the premium has been paid in installments. In tax-saving MFs, only units that have completed the three-year lock-in can be redeemed.
Now let us check out some interesting features across NULIPs.
Loyalty additions or bonuses
These are like the extra money given to policyholders in endowment policies. NULIPs give loyalty additions for any person who is paying a hefty premium, say like annual premium of Rs 5 lakh, and who pay premium for long periods, say 10 years. These additions can be usually paid after the 6th policy year.
Return of mortality charges
This is akin to giving free insurance cover. Mortality charges are the cost of insurance cover. Do remember this cost will be added back by the insurance company to your NULIP fund-value after the end of the policy premium. So, expect your fund value to rise by that extend on policy maturity. But not everyone offers this feature.
On the maturity date, these fund or wealth boosters will be added to the regular premium fund value, provided all due regular premiums have been paid up to the date. The fund booster is given as a percentage of one annualised premium. This booster is payable only for policies where the policy term is 10 years and above in most cases. Some plans have premium boosters that start from 6th year, like loyalty additions.
EdelweissTokio Life - Wealth Plus has something called an ‘additional allocation’. This plan provides additional allocation every year starting from the 1st policy year till the end of the premium paying term. These allocations are as a percentage of the premium. During the first 5 policy years, extra allocation will be added to the fund(s) along with each premium paid by you within the grace period.
No premium allocation charge
Earlier ULIPs charged hefty premium allocation charge of up to 90-100 per cent of first year premium. With most NULIPs, this is not the case. There is no such charge, which means right from the word go most of your money is invested. There is a fund management charge. For example, Bajaj Life Goal Assure product levies up to a maximum of 1.35 per cent per annum of the NAV for all the funds. There can be a policy administration charge per year. Also, there could be miscellaneous charges levied on per transaction basis. Some plans like the HDFC Life Click2Invest ULIP - Online Unit Linked Insurance Plan has no premium allocation or policy administration charge, but has fund management charge and mortality charges.
NULIPs also provide flexible settlement options. Under this option, you need to choose from settlement term (option of 1, 2, 3, 4 or 5 years etc.); and frequency of pay-out (yearly, half-yearly, quarterly or monthly instalments). This allows you to take a regular stream of payment, instead of lump sum. Lump sum amounts can be wasted on unnecessary spends.
Once you have chosen the settlement term and the frequency, the amount paid out in each instalment will be the outstanding fund value as on that instalment date divided by the number of outstanding instalments. Do note that the investment risk during the settlement period will be borne by you. If the markets fall, your fund value will reduce. Also, no risk cover will be available during the period of the settlement option. Fund management charge can be deducted by insurance company during the period of the settlement option. Alternatively, you will have an option to withdraw the fund value completely, at any time during the period of settlement option.