ULIPs in the new dawn

“This product can give you fantastic returns, Sir. The earlier version of this plan had given a 32% return. It is a fantastic investment option, even though it is an insurance policy”, an insurance agent was telling Ravi when I came in. The agent was just leaving. He had left behind some colourful brochures.
Ravi turned to me and asked skeptically, ”Are such high returns possible from this ULIP?” . “Everything is possible in certain timeframes. What you need to have asked is, in which period it gave that return and what was the return of the benchmark in that period. That would have given you an indication of whether this fund has performed well or not.” I continued. ”You also need to look at the charges. The charges are supposed to have come down. But the charges in the first few years are still high. In one of the plans, the premium allocation charges for the first three years are respectively, 30%, 15% & 10%”.
Ravi was amazed. “But, I understand that the difference in gross & net yields should be no more than 3% for policies of term 10 years or less & 2.25% for policy term over 10 years. I thought it will be low due to this regulation”. I was able to understand the confusion. “ That will apply over the tenure of the policy, not year on year”, I said.
“There are other charges as well, if you want to know. Policy Administration Charges is another head, you would want to look at carefully. In the same policy, the Policy Administration Charges are 0.4%pm, for the entire tenure ie. 4.8% pa, throughout the policy term”, ventured I. “That high? “, gasped Ravi. Today was his day of surprises. “Yes. It is. And there are products where it is higher. Policy Administration Charges would be charged as a percentage of the premium, which penalizes those who pay higher premiums. ”, I said.
“So, what has come down then?”, Ravi wanted to know. I did not have a readymade answer to this. “ Fund Management Charges have come down a bit. Very high charge products ( Premium Allocation Charges in some were as high as 70%) have been weeded out. There are still charges which may not even come under the purview of the new regime. For instance, any cost associated with investment guarantee is excluded from the calculation of net yield. So, guaranteed NAV products have an element of cost that is open to creative use. Also, if you were to surrender after 5 years, most of the front loaded charges would have been paid and yet the regulation restricting the difference between Gross Yield & Net Yield, does not apply. Hence, it will be a big handicap for those who want to surrender early.”, I concluded. Ravi was absorbing all this intently. I now moved away to get my cup of tea.

published in Moneycontrol.com in May 2010