Since their launch, Unit Linked Insurance Plans (ULIP) have been a complete rage; but that's not the case now. This year, thanks to the slowdown, insurers are seeing lower premium income compared to last year.
So to maintain the spark in ULIPs, insurance companies are trying to entice buyers by offering guaranteed returns on ULIPs.
How's that possible? Let’s decode.
As of now three insurance companies are offering guaranteed ULIPs.
Unlike non-guaranteed ULIPs, these newly launched plans shield you from the downside of the market by assuring guaranteed returns.
He explains that these plans are like investing in fixed income products that offer secured returns.
Workings of the plan:
These plans are structured into four phases.
Subscription phase: During this phase, the plan is open for a limited time only. For instance, SBI’s Smart ULIP is open for a period of one year.
Premium paying phase: In this phase, you pay premium only for a fixed term, which is 3 years. However, SBI’s Smart ULIP allows you to choose the premium paying term for 3 or 5 years.
NAV build-up phase: During this phase, the reset dates, set by the companies are exercised. Reset dates are pre-decided dates fixed by insurance companies to record NAVs. Birla Sun Life and Tata AIG record NAV once a month on the reset date decided by them whereas SBI has two reset dates every month to record NAV.
These plans have a fixed term of 10 years.
Accumulation phase: The remaining policy term i.e. the tenure left after all the reset dates have been exercised is the accumulation phase.
What’s unique about guaranteed ULIPs is that they offer the highest Net Asset Value (NAV) recorded over a given a period of time.
Benefits:
Maturity benefits: On maturity, you get the highest of:
a. The fund value as on date of maturity OR
b. The fund value at the rate of 'highest recorded NAV' OR
c. The starting NAV of Rs 10 per unit
The is highest recorded NAV is the higest NAV among all reset dates.
Death benefits: In case of your untimely death, either fund value or sum assured will be paid out to your nominee, depending on whichever is higher.
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What should you watch out for?
1. Charges are more:
When you compare guaranteed ULIPs to single premium or limited premium paying term plans, the charges on the former are on the higher side. The table below explains this. It shows the net amount invested at the end of three years after deducting the policy allocation charges. The sum assured for the plan is assumed to be Rs 5 lakh and premium Rs 1 lakh.
Note: The calculation for Tata AIG has been done taking into account the charges for 1st year only because InvestAssure Plus is a single premium product. However, for information purpose, Invest Assure Apex shows figures for 2nd and 3rd years also.
2. Limited option in hands of investor
These plans don't have a switching option. They also have only one choice of fund that invests in a mix of debt and equity. An investor is at the mercy of the fund manager because on one hand, his money is locked in while on the other, he has not flexibility to switch.
Conclusion:
Harsh Roonga, CEO, Apnapaisa.com says, "If you want to invest in safe avenues there are better options like public provident fund, bank deposits; why pay a charge for it."
And anyway, he adds,"It’s always better to keep your insurance and investment needs separate."
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