Most of us have that one ULIP policy that we know nothing about. A few (un)fortunate ones have more than one.
It is one product that is sold like the best product you will ever get! Like ever! It lets you invest money and you get Insurance cover too – free free free!!
The Sales pitch for ULIP
ULIP is one of those products that don’t need a lot of hard sell. It is so complicated in its structure that an investor would rather hear benefits and buy it than trying to find out the drawbacks.
I wrote in details about TVM (Time Value of Money) in my last post, that it helps in comparing investment decisions.
The thing with ULIP is you will never be able to figure out the variables, so it gets impossible to calculate actual expected returns and therefore there is no way to make a logical comparison.
So the agent will sell it to you as insurance product, as investment product, as debt product, as equity product, as anything really.
The ‘magical’ benefits are :
- ‘possibility’ of doubling your money in 10 years!
- Getting a life cover of ‘10 TIMES’ the annual premium you pay!
- Highest NAV guaranteed!
- ‘NO surrender charges’ after five years!
- Tax benefit!
- ‘Better’ Investment Product!
And the list goes on, because the product is designed in such a way that an agent has a free hand to say whatever he wants!
Truth be told, all they are doing is exploiting the financial illiteracy.
When we know nothing, everything is true.
Uhm, what is ULIP again?
Oh yes, ULIP stands for Unit Linked Insurance Plan. It is a product that combines Insurance and Investment. ULIP has a lock-in period of 5 years. Premium paid for ULIP is eligible for tax deduction under Section 80C. Returns of the policy on maturity is exempted from tax under Section 10D.
And with that, my essay on ULIP is over!
There is nothing more in the product to tell.
Yet, there is so much.
Story of my ULIP
Let us take ULIP that I have as an example.
The agent who sold it to me said, “Invest 50,000 every year for five years, then let it sit for five more years. And you get Rs 5 lakh cover.”
Let’s see what that means,
First five years, negative 50,000 because it is paid from my pocket and 5 lakh after 10 years because that’s what the cover is.
When calculated, this means 8.9% annualised return.
It is a simple excel calculation. Don’t get overwhelmed with ‘XIRR’. For now, it just means return for us.
Hmm, not bad!
Except, he forgot to complete his sentence – “….and you get 5 lakh cover, IF YOU DIE!”
Assuming that a normal retail investor, a fresh student out of indian education system will know what “cover” means is the worst possible assumption made. And most profitable one too.
Anyway, what if I manage to survive?
Some time spent navigating through the fabled “policy document” and I find this “Guarantees you 110% of the highest NAV recorded within first seven years of launch of the series, at maturity, subject to minimum of Rs 11”.
Okay, so the initial NAV at start of policy premium was 10.37 (you can find this on your Premium paid receipt for 1st year).
Current NAV is 16.79. (From latest statement).
Assuming today’s NAV is the highest NAV that will be ever recorded, my guaranteed return will be at 110% of 16.79, that is 18.469.
Now, to calculate the return for 10 years on the basis of NAV, we will go back to TVM.
PV = 10.37
FV = 18.469
T = 10
You know what the return looks like? 5.94%.
And my eyes thus wandered back to the policy document, trying to find a ray of hope. But look what I found!
The charges! And then some more!
- Premium Allocation Charges : Charged on Premium paid every year. Units are allocated after deduction of these charges.
Here’s what it means for my policy:
Everytime I paid Rs 50,000 premium, units were being bought for lesser amount.
That’s a total of Rs 10,000 Premium allocation charges in 5 years. Okay, not that bad. Means out of Rs 2.5 lakh I deposited, units were bought for Rs 2.4 lakh. Right?
2) Policy Administration Charges per month : % of annual premium and charged throughout the term of policy. Meaning charged per month for 10 years!
That’s a total of Rs 10,500 for full term.
Okay, when will this end?
3) Fund Management Charges + Additional Charge : I know you may already be worried about your policy, so I will be considerate and assume that my funds do not grow by even Re 1 and charges are levied on only the invested amount.
I have seen fund values go in negative too! But that’s for later.
By the way, charges are 1.35% + 0.50%.
So Fund Management (FM) charges for year 1 is calculated on Rs 50,000; year 2 on Rs 1 lakh and so on. From Year 5 to year 10, FM charges are calculated on Rs 2.5 lakh assuming no appreciation in fund value.
The total charges are Rs 29,500.
Which is not the actual case. Even if appreciation is dismal, it is there. So the actual value will be much higher.
There is a Mortality charge too, and not to forget the service tax.
But we don’t need to know that anymore, right? We can see what a deep mess we are in.
So you see, Premium allocation charges are front load. Meaning, when I put in Rs 50,000 the company deducts the charges and tells me net investment being made, i.e Rs 47000. But then it goes on to deduct Mortality and Policy Administration charges from it.
Though there is one more thing you should know.
When you sit with your ULIP statement, you won’t find Fund Management Charges as expense anywhere. Yes, that Rs 29,500 the biggest expense on my policy account, won’t show anywhere.
That’s because it is adjusted from NAV. Meaning the NAV figure of 16.79 that I see is post adjustment.
But I do get Insurance + Investment!
You are not going to feel good after this.
I took this policy when I was 27, by age.
For a 27 year old, a 1 Cr term policy for 10 year term can be bought at annual premium of Rs 5,600.
I could have invested balance Rs 44,400 every year in a debt fund for 5 years paying me 7% return and then let it sit for another 5 years. Like ULIP plan.
Skipping the math of it, I would have Rs 3.58 lakh after 10 years.
If I died in between, the family will receive Rs 1.03 Cr. (Term insurance + debt investment)
You know what happens with the ULIP I have?
With NAV at 18.469, I will get Rs 3 lakh.
Even with the NAV of 20, I will get Rs 3.24 lakh after 10 years.
If however, I died, you know what the family will get?
Rs 8.24 lakh.
Yes okay, you are allowed to laugh.
(Death benefit is sum assured + fund value. Wow! So thoughtful!)
Here’s how it looks.
With term + Mutual Fund, I will pay Rs 5,600 for next 5 years also. But seriously, do I even have to get into cost benefit analysis here? Besides, in absolute terms, it will still be Rs 6000 more profitable with Term + Mutual fund.
Only debt mutual fund, with same plan of Rs 50,000 for five years and staying put for next five would be at Rs 4.03 lakh.
Last one I promise
For anyone paying 50,000 per annum in annual premium, Rs 8.24 lakh as life cover is a joke.
And then I see policies out there with Rs 2 lakh per annum premium and Rs 20 lakh life cover!
Btw, did you notice, the ‘cover’ or ‘sum assured’ is always 10 times the annual Premium.
You know why?
That’s the minimum cover they have to give.
And so they give minimum only.
And now I can’t stop laughing. What was I even thinking?
Or was I?
Also published on Medium.