India’s unit linked insurance plans (ULIPs) got a facelift in 2010 with new regulations. But having already burnt their fingers in old ULIPs, not many investors were willing to bet on them. Even today, many look at them with suspicion.

However, with the recent Budget announcement of a long term capital gains tax of 10 per cent on equity investments through the stock markets and MFs, ULIPs have become the talk of the town; gains on equity investment via this route continue to remain tax exempt.

Those rooting for fairness in taxing investment products might not be able to have ULIPs included since these are treated differently under the Income Tax Act due to the ‘insurance’ component in them.

Maturity proceeds from ULIPs are tax exempt under section 10 (10 D) — provided the sum insured is at least 10 times the annual premium. Today, most insurers meet this requirement. An added advantage is that the premium invested can also be claimed as a deduction from income up to a maximum of ₹1.5 lakh under section 80 C.

A ULIP (unit linked insurance plan) is a combo-product that offers life insurance and a market-linked investment.

ULIPs turned more consumer friendly after the 2010 regulations of the insurance market watchdog IRDAI, which capped expenses, put a five-year lock-in and set a minimum sum assured requirement.

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But the favourable aspects notwithstanding, investors need to watch out on a few things before betting their money on ULIPs:

One, while after the 2010 regulations, charges on ULIPs have been capped (the difference between gross yield and net yield can’t be more than 2.25 per cent on maturity), it still continues to be front loaded. So, exiting the policy in the initial years will pinch. For those with short-term investment horizons (of five years or less), mutual funds are still a better choice.

Two, there is absolutely no liquidity in the first five years of investment in a ULIP. You may stop paying premiums, but the money already paid can’t be taken out till the end of five years.

Three, the insurance component in ULIPs is small and may not suffice for an individual’s requirement. The life cover a ULIP offers may be 10/20 times the premium, but in a term life insurance, the cover will be multiple times higher.

You also need to understand that the charge structure in ULIPs is different from that of mutual funds. While in MFs, the NAV (net asset value) captures the value of each unit of investment after all costs, in case of ULIPs, NAV is the value of the fund minus only one charge — which is the fund management charge. The policy administration charge, mortality charge and charges, if any, for switching funds are adjusted by cancellation of units outstanding.

The premium allocation charge (which includes distributor commission) is deducted first. It is only the premium net of this charge that gets invested. So, your actual return from a ULIP will be lower than the returns based on NAV.

Do note, however, that the new-age ULIPs don’t have many of these charges.

HDFC Life was among the first few to launch an online ULIP in 2014. Saving on intermediary cost, the company offered a ULIP with ‘zero’ premium allocation and ‘zero’ policy administration charge.

Today, there are many online ULIPs in the market and their expense structure is as low as direct plans of MFs. They also have more competitive features — refund of the mortality charge (as in the case of Bajaj Allianz Goal Assure), a fund management charge of just 1.25 per cent for equity (Max Online Savings Plan) and a return booster by providing loyalty addition (Edelweiss Tokio Life Wealth Plus).

Here, we pick for you the four best ULIPs in the market. All of these are comparable on returns of their funds with those of MFs in respective categories.

Max Online Savings Plan

This plan offers flexibility in the choice of policy/premium term (5 to 30 years) and gives a choice of 10/15/20 times the premium for sum assured. The plan offers two variants.

In Variant 1, ‘Max Life Online Savings Plan - Wealth Creation Solution’, there are three cover options. One can ask for a sum assured of 10/15/20 times the premium if aged 18-45 years; the choice is between 10 and 15 times the premium — if aged between 45 and 55 years. If over 55 years, one has to settle for a sum assured of 10 times the premium. The sum paid on death is the sum assured under the plan or the fund value, whichever is higher. On the individual surviving till the maturity of the plan, the fund value is paid.

In variant 2, ‘Max Life Online Savings Plan - Child Future Solution’, the cover (sum assured) is fixed at 10 times the premium. It is a type II ULIP where the policy doesn’t terminate after the insured’s death. Though the sum assured is paid to the nominee, the policy continues to remain in force funded by the company. Then, at the end of the policy term, the fund value also is paid to the beneficiary. This plan scores over others in the market also because it has the lowest cost structure. The mortality charge is 0.8 per 1000 sum assured (for age 30). Most others charge around 1-1.33 per 1000. The fund management charge for equity funds is 1.25 per cent versus 1.35 per cent in the case of most other ULIPs. In the case of balanced funds, it is 1.1 per cent versus 1.25-1.35 per cent of others and in debt funds it is 0.9 per cent compared to 0.95-1.35 per cent of others. It also allows switching between funds free of cost.

The plan offers five fund options and one investment strategy. All the five funds of Max Life have given a return that is above that generated by the respective benchmarks most of the times.

Edelweiss Tokio Life Wealth Plus

Edelweiss Tokio Life Wealth Plus offers two investment strategies — Life stage and duration-based strategy and Self-managed strategy.

The life and duration-based strategy is a formula-driven investment solution. Based on the age, risk profile and tenure of the individual, the investible premium is allocated into — equity large-cap fund and bond fund.

Under the ‘self-managed strategy’, the policyholder is allowed to invest in any of the five available funds. All these funds have outperformed their respective benchmarks. They have also delivered almost similar returns to that of the respective MF categories.

The plan allows unlimited switches among funds free of cost. An attractive feature of the plan is that it provides additional allocation to the fund every year starting from the first policy year till the end of the premium paying term. This is 1 per cent of the annualised premium every year for the first five years. From the sixth policy year, the additions are called ‘premium booster’. The premium booster for the corresponding 6-10, 11-15 and 16-20 policy years are 3, 5 and 7 per cent respectively every year.

In this plan too, the premium allocation charges, policy administration charges, switching charges, premium redirection charges and partial withdrawal charges are nil. The fund management charge is 1.35 per cent for equity funds, which is a tad higher than what is charged by Max Life in its online ULIP. Another highlight of the plan is, the insurer stops charging mortality charges when the fund value exceeds the sum assured. In Max Life’s ULIP too, in variant 1, mortality charges are not levied once the fund value goes higher than the sum assured.

Bajaj Allianz Goal Assure

This is the most recently launched ULIP in the market. The plan offers four portfolio strategies — investor selectable portfolio strategy (eight fund options), wheel of life portfolio strategy (premium is invested based on number of years to maturity across five fund options), trigger-based portfolio strategy (75 per cent in equity and 25 per cent in debt, but when there is 15 per cent upward movement in unit price of equity, the value in excess of three times the value of units in the bond fund is transferred to a liquid fund to secure the gains) and auto transfer portfolio strategy (choice between bond fund and liquid fund, but the money invested can be transferred to any fund of your choice every month).

The attraction of the plan is that it returns the mortality charges collected from you at the time of maturity of the plan. It also offers a ‘fund booster’. While Edelweiss Tokio Life’s Wealth Plus gives booster every year in small doses, here, it happens at milestone years of 10,15 and 20 years at 20, 40 and 60 per cent respectively of the annual premium. But, a small back of the envelope working will show you that booster additions in Edelweiss Tokio Life’s plan are more than that given in Bajaj Allianz’s plan.

However, in the Bajaj Allianz’s plan, fund booster aside, there is also a loyalty addition (only in case where the premium is ₹5 lakh or above) at the end of 10, 15 and 20 years to the tune of 0.5 per cent, 1 per cent and 1.5 per cent of the premium, respectively.

Furthermore, at maturity, the customer who opts to receive the maturity benefit in instalments over a period of five years will receive the benefit of ‘Return Enhancer’, which is an addition of 0.5 per cent of each due instalment. However, one thing you need to note is that you will have to cough up policy administration charge — ₹400 per annum increasing at the rate of 5 per cent every year (subject to a maximum of ₹6,000). The charge will be deducted every month by cancellation of units. The fund management charge is 1.25-1.35 per cent for equity funds and 0.95 per cent for debt funds.

HDFC Life Click2Invest

The policy allows choice between eight funds — from pure equity to pure debt funds to balanced funds. You can invest in a combination of funds by allocating your fund between different fund options. You are allowed to switch between funds, but in a year, only four fund switches are free. Subsequent switches, if any, will attract a charge of ₹250 per request or a reduced charge of ₹25 per request if executed through the company’s web portal. The policy charges for mortality risk and fund management (at 1.35 per cent per annum).

While this product is a little expensive compared to the online ULIPs that have come up recently, it has its own attractions. It allows a minimum annual investment of ₹12,000 for regular premium policies. The minimum annual premium in case of Edelweiss Tokio Life Wealth Plus is ₹48,000, in case of Bajaj Allianz Goal Assure and Max Online Savings Plan, it is ₹36,000. So, those of you having limited room for investment in ULIPs could look at this plan too.

Offline ULIPs

Offline ULIPs still make a chunk of the market in ULIPs. A quick check of some of these plans — Max Life Platinum Wealth Plan, ICICI Prudential Elite Life Super, SBI Life Smart Elite, Tata AIA Wealth Pro and the small-ticket plans — Max Life Fast Track Super Plan, Bajaj Future Gain and SBI Life Smart Wealth Builder, shows that the net return on a gross of 8 per cent is 4.8-5.7 per cent, which indicates an expense ratio of 3.2-2.3 per cent. This is significantly higher compared to the online ULIPs (1.5-1.7 per cent). Over a 20-25 year period, this will make a large difference to your corpus.

Some of these plans, such as ICICI Prudential Elite Life Super and Bajaj Future Gain are available online too on their respective websites. But, note that these are offline plans made available online and have the routine charges such as premium allocation and policy administration charge. So, don’t be misled. If a policy is available online it is not necessarily a ‘zero’ charge plan. You need to look at the benefit illustration or the product brochure to find out if it is an ‘online’ plan and if there are charges other than mortality and fund management on it. If you are financially savvy, you could look for an online ULIP. The process of online buying is the same, be it a term plan or a ULIP. What is different is that in the case of ULIP, there are many choices/decisions one needs to take — on premium/policy term, riders, and, so on. If you think you could take these decisions by yourself, then online plans are the best choice.

Our take

Online ULIPs are in line with direct plans of mutual funds on charges. The difference between the gross and net return for online ULIPs comes to about 1.5-1.7 per cent. In mutual funds, TER (total expense ratio) in regular plans is 2.5-3 per cent and in direct plans it is an average of 1.4 per cent. Thus, if you compare on expenses, ULIPs are as good as MFs.

Edelweiss Tokio Wealth Plus has the highest IRR (for a gross return of 8 per cent, the net return is 6.51 per cent) of the four online ULIPs discussed here. Note that this is for a 20-year term for an annual premium of ₹60,000 for a male of 30 years assuming investment is in equity fund.

The IRR may moderate when premium/policy term, age or choice of investment fund changes. And, given that the expense ratio of the other three ULIPs is only 10-20 basis points higher, it is suggested that you base your buying decision on product features — minimum premium investment, flexibility in choosing premium/policy term and, importantly, the track record in fund performance.

The accompanying table shows that across time periods, Bajaj Allianz Life’s funds have done better than others. We also suggest that you buy ULIPs only online as charges are minimal. Currently, while Bajaj Allianz Goal Assure, HDFC Life Click2Invest can be bought on the company’s website, Edelweiss Tokio Life Wealth Plus and Max Life’s Online Savings Plan can be bought on policybazaar website for now and soon on the respective company’s website.

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