This is the perpetual question & dilemma we face as planners... Are combination plans like ULIPs better or is it better to treat investments and insurances separately? This question needs some examination. Charges in ULIPs have come down, since September 2010. Even then, the charges on premium allocation & policy administration alone ranges between 35-50%, on an average, for the first five years. Also, the surrender charges have come down drastically, though the surrendered amount would be available only after 5 policy years. There will be fund management charges of between 1- 1.35% pa and applicable mortality charges, every year. ULIPs being combination products, usually with a focus on a particular goal, would then be a good product, right?
The answer is not straight forward. For that we need to compare with ULIPs, an alternative product bouquet giving similar benefits. The alternative is a term insurance and investment combination. Term insurance premiums have come down dramatically, in the recent past. For a 35 year old male, premium for Rs.50 Lakhs would now come to in the region of Rs.8,000/-pa. This makes the proposition pretty attractive.
As far as investments are concerned, the field is wide open. One could invest in Equity, Mutual funds of any persuasion, PPF, FDs, other debt products, properties, commodities etc. The investment mix would be dictated by their goals and the appropriate investment choices, over time. This gives tremendous flexibility to the investor. This could also, result in confusion and decision paralysis.
From a pure cost point of view, assuming similar returns on the funds deployed in equity Mutual funds & ULIPs, some calculations indicate that the current ULIPs can match and better the returns from the term insurance & investment combination from 12 -15 year onwards. Mutual fund schemes have a longer performance history and have outperformed ULIP funds. It may be that ULIP funds are differently managed and take longer term calls, which is factual. The average returns of the Large cap equity mutual funds that have completed 10 years is 23% CAGR. Sensex has returned about 18%+ CAGR in 10 years. The index returns since 1979 too is incidentally about 18%+. Most ULIP funds do not have that kind of longterm track record too.
There are other issues apart from performance. Some ULIP funds may perform well at some points. But since in ULIPs, you cannot simply change over from scheme A from one fund house to scheme B from another fund house ( like in Mutual Funds ), there is a huge problem if the funds underperform. The investor is then stuck. How can the investor know in advance which funds will perform well, over a 20 year period? Therein lies a major problem.
If however, ULIPs are compared with direct equity investments instead of Mutual Fund investments, the costs will be far less and ULIPs will not be able to match them at all in the foreseeable future.
Performance however is not the only argument for going for the term + investment combo. In ULIPs the investments go into a couple of funds, throughout the tenure. This results in a huge concentration risk. Should the funds invested in underperform, the investor would be adversely affected, in view of the huge exposure. ULIPs give some choice through their funds. The choices available outside like PPF, commodities, properties, direct equity ( where costs will be very low in a buy and hold situation ) etc. are outside the ULIPs purview. These choices ensure better diversification & lower costs, than in an ULIP. Investments are made for the longterm. However, if it needs to be surrendered or partially cashed out, many ULIPs have limitations. Taking out the surrendered amount is possible after 5 years only. Partial withdrawal also has limits in some ULIPs. Though in the normal course, this may not be necessary, life is never linear. Should the funds be required, an ULIP can impose unnecessary conditions and penalties at a time they require relief.
Investment in ULIPs may keep going to a couple of funds, irrespective of the situation, over a long period. This is not the best way to invest for the longterm. The funds have to be allocated appropriately over time, in appropriate instruments or have to be reviewed and reoriented. That would not be possible in ULIPs, unless they have asset allocation funds among them.
The charges once you get into, will not change. This looks positive. It is as much a negative. For instance, charges in ULIPs have come down in the last six months. However, if you have bought the product prior to that, the higher charges will apply throughout term. This limitation is not there in other investments. You could simply migrate to lower cost products. You could also redo your term insurance at a lower premium, in case it comes down.
Lastly, many people will find it difficult to commit the amount required for a goal, every month, right from the beginning due to commitments like a home/ car loan payments. However, later in life they could hugely increase it. ULIPs allow topups, but with limitations. Investments of course allow you the full latitude.
Now, it’s over to you. Decide whether it is ULIPs or simple term insurance & investments, that will work for you.
Article by Suresh Sadagopan ; Published in The Economic Times on 11/5/2011
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