ARE UNIT LINKED INSURANCE PLANS BETTER INVESTMENT?
Sudindra V R and Ranjith Rajan
A ULIP or Unite Linked Insurance Plan is a market linked Insurance product which combines Investment and Insurance. ULIP is a plan which linked to invest in various investment alternatives as well as flexibility in investing in equity or debt fund as per investor risk level. ULIP is a combination of Insurance and Investment option considered as most popular among investors. Premium amount is divided into multiple categories, which includes Premium allocation charges, surrender charges, Mortality charges, fund management charges, fund switching charges, discontinuation charges and the remaining sum of money invested across various investment option. It is beneficial for all categories of investors, as a good investment options due to transparent structure, features and charges, flexibility to switch between funds, insurance coverage options, flexibility to choose premium payment frequency, additional risk coverage by adding riders, various fund option suitable according to risk taking ability and tax benefit u/s 80C, 80D and 10 (10D). Although Mutual funds and traditional plans are available in market ULIP is most comprehensive and suitable to all categories of investors.
Are ULIP’s Competitive products?
ULIP plans are used for the purpose of wealth accumulation recommended by many financial planners. It gives flexibility to fund their future financial goals for retirement, wealth creation, children’s educations, health benefits and other financial goals of investors.
Pros and Cons of ULIP
ULIP’s are transparent wherein you can control where your money invested, gives flexibility of multiple fund options, get additional benefits like critical illness and additional disabilities, disciplined investment if investors staying for long term. Although ULIP’s are better investment, it includes some of the limitations: lock in period of 5 years, having fixed policy terms, higher the age protection benefits become expensive and insurance agents may misguide the investors.
For better clarity the following study done
Assume that the Investor aged 30 years investing INR. 50,000 as a premium on annual basis with sum assured amount of INR 5,00,000 investor is having an option to choose various ULIP product of Insurance companies.
Table 1: Table showing various ULIP products, Maturity value and past performance.
Plan | Invested amount | MV @ 8% | Past performance | ||
1 year return | 2 years returns | 5 years returns | |||
HDFC Click 2 Invest | 250000 | 299000 | 9.69 | 10.46 | 9.03 |
SBI Life Insurance Wealth Insurance | 250000 | 298000 | 10.05 | 11.18 | 9.81 |
Bajaj Allianz Future gain | 250000 | 294000 | 10.01 | 11.27 | 9.74 |
Aegon Life Invest | 250000 | 294000 | 9.06 | 10.51 | 8.43 |
Birla sun life insurance Fortune Elite | 250000 | 284000 | 8.98 | 10.53 | 9.22 |
PNB MetLife Mera Wealth plan | 250000 | 283000 | 9.48 | 10.47 | 8.83 |
ICICI prudential Wealth Builder II | 250000 | 272000 | 10.58 | 10.86 | 9.71 |
Sources: Policybazaar.com
Table2: Table showing the other investment alternatives and maturity values
Various schemes | Effective Annual Interest rate | Investment amount | MV after 5 years |
Savings account (Bank/post office) | 4% | 250000 | 270816 |
Post office Term deposits 5 years | 8.03% | 250000 | 293505 |
PPF | 8% | 250000 | 293330 |
KVP | 7.7% | 250000 | 291580 |
Bank fixed deposits | 7.5% | 250000 | 290419 |
Post office recurring deposits | 7.5% | 250000 | 290419 |
Sources: authors calculations.
* Assuming the Rs. 50,000 amount is invested for 5 years.
Interpretations:
From the above calculation ULIP’s are better investment alternatives as it provides twin benefits of great return with risk coverage. The maturity values HDFC, SBI, Bajaj Allianz and Aegon ULIP products are higher than with other investment alternatives. Maturity values have taken based on 8% returns, but the historical returns on various ULIP schemes with minimum of 8.43% and average of 9.9% which is higher than any other investment alternatives. Apart from the returns, the tax implication on other investment may further reduce the returns on other investment alternatives. Mutual funds are also providing greater flexibility with good returns, but the risk coverage will not be available in Mutual fund. Hence the ULIP’s can be considered as one of the investment options for investors. ULIPs gives profitable for individuals who are not willing to invest in equity related investments like Mutual funds, direct investment in stock market. Although ULIP’s may not give immediate liquidity as lock in period exists, this will give greater profitabi
lity in long run.
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<policybazaar.com>
<https://www.relakhs.com/small-saving-schemes-interest-rates-2016-2017-fy/>
Mr. Ranjith Rajan K is working for Altisource Pvt. Ltd. as Specialist-Due diligence from last 10 years and also a member of FPSB India, professional financial planners body.
