ULIPs charges are too high

Economic desk: How many times has it happened that you have purchased a pair of jeans while window shopping just because it was on a sale? 40% off- sounds like a sweet deal doesn’t it? It’s but obvious that we want to get maximum value out of everything we buy. Exactly the same logic comes into play when we plan our investments. When you invest your hard earned money;what is the one thing you look for – High returns, right? And what is that one thing that will stop your investment from giving you the value you expect?That’s right – high charges.When we think of “High charges”, the first investment option that comes to our mind probably is a Unit Linked Insurance Plan (ULIP).

ULIP:High charges- Is it a myth or reality?

Getting right to the point; we broke down the charges to get a clearer picture. Here is what we found out about the new ULIP and its present charges.

• Premium allocation charges reduce over the long term-

Past-These charges were deducted straightaway from the premium and the remaining amount is used for investing in the funds selected by the policyholder. For example if the charge is 4% and your monthly premium is Rs. 50,000, the insurance company will deduct 2,000 upfront and invest 48,000 in the funds of your choice.The fear of the past users of the ULIP seems justified as before 2010 the ULIPS hadvery highpremium allocation charges–as much as80% of the first year premium; as commissions were 30-35% of the premiums you paid in the initial years of the policy.

Present- Today with IRDA intervention this charge structure has come down drastically for the first year and further reduces over a longer period of time. Moreover most of the present plans can be easily bought online; hence removing the agents commission as well and are proving to be even cheaper than mutual fund schemes in the longer term.

Varying depending on the company; they are some which are even in single digits(average seven per cent) in the first year now.For instance this table of a ULIP from ICICI Prudential shows how premium allocation charges reduce over a longer period of time-

• Fund management charges have been capped –

Past-As the name suggest they are charged towards managing the funds, and are charged as a percentage of the assets’ value. They are higher for equity-oriented funds as compared to debt-oriented funds. Charges did not have any capping or limitations earlier and hence these charges wererelatively higher.

Present – The IRDAI again has come to the rescueand set a cap of 1.35% per annum on fund management charges.

• Overall effect of IRDA intervention on charges –

Past-While making a comparison of changes in overall costs we found that the total annual chargesfor a ULIP were very high almost as much as the 1st year’s premium.

Present- TheIRDAI has brought down the annual charges to 3% for the first 10 years of holding and 2.25% for more than 10 years. Hence the longer you are able to invest the product; the charges seem to reduce further.

• Extra bonuses

Earlier extra bonuses and top ups on a ULIP free of cost were unheard of; but today the ULIP has been revived by many companies to become much more beneficial. For instance theULIPs byICICI Prudential Lifeprovides the option of loyalty additions and wealth boosters. Loyalty additions help lower the fund management charges. So if you were to pay regular premium amount of the ULIP for 6 years then from the end of the 6^th year you will get an additional loyalty addition of 0.25%. For wealth booster again if you paid premium regularly for10 years, then from the 10^th year you are allocatedwealth booster units which will be equal to 1 % of the average fund value. This will make your investment grow without you needing to invest any extra money at all.

• You get a life cover at a very small cost

Deducted on a monthly basisULIPs provide life cover by charging mortality charges. The insurance cover and the actual amount paid under this head depend on the amount of life cover sought, the age of the policy holder and other such details. Since the primary objective of a ULIP is investment; this is actually an added benefit provided to the holder.

Comparison of charges in the long term

Finally we did a comparison of the ULIP with a mutual fund in the long term. To make an appropriate comparison we needed to take a term plan to go with the mutual fund.

• ULIP- we picked a typical plan that has Policy Admin fee (Rs 6K for first 5 years and 3150 for next 10 years), Premium Allocation charge (3.2%), fund management charges (1.35% of fund value), etc., for a 35 year old male, investing for 15 years with a premium of Rs. 1 lakh per year and an insurance cover of Rs 10 lakhs
• Mutual fund(MF)– with a fee of 2% and no entry load and no exit load + Term plan- again with the same 10 lakhs cover; with an annual premium of Rs 2466

We observed that for the first 5 years the cost of ULIP exceeds the 2^nd option of MF +term solution, but then the charges start dropping and the ULIP plan balances too increased very quickly to catch up and even outpace the mutual fund. By the 12th year the total cost of the ULIP plan is much lower at Rs. 28,600 as compared to the MF+term solution which is Rs. 40,000. While in the 2^nd year it was the opposite where the ULIP plan cost Rs.11,500 while the MF+ term cost only Rs.6,500; which is the reason for confusion amongst investors regarding ULIP charges.

The verdict on the ULIP

• It is agood long term investment due to reducing effect of charges
• In 15 years and longer period ULIP plan beats MF+term solution on cost and charges
• It is a good option for goal based investing, as the insurance amount will reduce proportionately when the assets of the investors go up
• Considerably reduced charges compared to earlier due to IRDA intervention
• If you do not like to take risks you can opt for the debt funds. You can switch between equity & debt funds without any hassle. In mutual funds you have to exit a mutual fund investment & enter another mutual fund if you want to switch asset classes. Entry & exit loads will apply that lead to increased charges

Finally if the long term investment is not a bother; then a ULIP is a feasible option to consider; if you are looking for a product that offers great returns as well as an insurance cover.