Recently launched Ulips have very low charges. Find out why you should buy these insurance-cum-investment plans now.
They were once the most bought financial product. Then Ulips became the most reviled investment, forcing a string of reformatory measures. Now
these investment-cum-insurance plans have changed once again to become a low-costinvestment option. In fact, some of the Ulips introduced in recent months are cheaper than the direct plans of mutual funds.
We won’t be surprised if this evokes an angry response from readers. Ulip became a four-letter word due to the high charges levied by insurance companies and rampant mis-selling by distributors. In some cases, the charges were as high as 80% of the first year’s premium. Distributors lured gullible investors by not revealing the high charges and showcasing only the returns offered by the market-linked product.
The Insurance Regulatory and Development Authority (Irda) clamped down in 2010,capping the annualised charges of Ulips at 2.25% for the first 10 years of holding. The charges were fixed at this rate because it was the average cost charged by competing products such as mutual funds. With no incentive left for distributors, Ulip sales plunged.
In recent months, insurance companies have sweetened the deal for investors byreducing the charges even further. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual investment is `2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn’t have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don’t have lower charges but compensate long-term investors with `loyalty additions’.
But the Click2Invest plan from HDFC Life is a game changer. The only charge it levies is an annual fund management fee of 1.35% of the corpus value. There is also a mortality charge but that is for the life cover offered to the policyholder. The low charges make the Click2invest plan cheaper than even the direct plan of a diversified equity fund. For instance, the direct plan of the largest equity scheme, HDFC Equity Fund, charges an expense ratio of 1.5% per year.
Some readers may pooh-pooh the idea of saving a sliver on costs. After all, a 0.15% saving on costs makes a difference of only `150 on an investment of `1 lakh. While this may seem small, the difference in the cost can balloon into substantial savings in the long term.
Shed your aversion to Ulips
This transformation of Ulips from a costly bundled product to a low-cost option has led to a change of heart among financial planners as well. For long, they have advised clients to keep insurance and investment separate. Says S Sridharan, head of financial planning, FundsIndia.com. “Low-cost products like this will be suitable for investors who want to combine insurance with investments,“ he adds.
He’s not alone. With more low-cost Ulips on the anvil (at least two companies are awaiting Irda’s approval for their low-cost Ulips), many financial planners are changing their tune. “The Click2Invest plan from HDFC Life is a good product. We are recommending it to our clients,“ says Jaya Nagarmat from Investor Shoppe. Tanvir Alam, founder & CEO of Fincart goes a step further. “This Ulip will give the mutual fund industry a run for its money,“ he says.
Indeed, it is time to get rid of the historical aversion to Ulips and look at them through the prism of lower charges. This will not be easy because a lot of investors have been scarred by their experience with Ulips. Many have lost money due to the doublespeak of distributors and the failure (or unwillingness) of insurance companies to redress their grievances. Policyholders lost money even though the markets were shooting up. Buyers didn’t realise that even though their funds went up by 15-20% in a year, they were suffering losses because only 40-50% of their money was actually invested in the first 2-3 years. “The new Ulips are facing the baggage of old Ulips,“ says Yashish Dahiya, CEO and co-founder Policybazaar.com.
The tax advantage
While the low charges of new Ulips make them attractive, the main advantage is the seamless and tax-efficient transfer from debt to equity, and vice versa. This switching may be for varied reasons, including rebalancing the portfolio oreven timing the markets by savvy investors.“Though retail investors may not have the bandwidth to switch on the basis of market views, people who are aware can make use of this facility very effectively,“ says Alam.
It is important to note that Ulip is not just about equities. Smart investors can also move within debt, shifting to long duration funds when interest rates are expected to go down and moving to short-term funds when rates are on the rise. If mutual fund investors do this, they will have to pay tax on the short-term and long-term capital gains made on the fund. Since Ulips are insurance plans, the gains and maturity proceeds are tax-free under Section 10(10d).However, the sum assured must be at least 10 times the annual premium for this tax benefit.
This year’s budget has changed tax rules for debt funds. The minimum holding period has been increased from one year to three years .Debt fund investors will have to pay higher tax if they rebalance by shifting out of debt within three years of investing. However, there will be no tax in case of Ulips. Investors should note that insurance companies allow only a limited number of free switches. While some Ulips allow unlimited free switches, others permit only 4-12 free switches in a year. There is a `100-250 charge for every switch beyond the free limit. Like banks, insurance companies also charge you less if you do the transaction online. For example, HDFC Click2invest charges `250 per additional switch if done offline and only `25 if the same is executed online.
Decoding the charges
The charge structure of Ulips is not as straightforward as that of mutual funds. There is a premium allocation charge, a policy administration charge and a fund management charge. There is also the mortality charge for the life cover offered by the plan. The 2010 Irda guidelines say that the combined charge cannot be more than 2.25% a year in the first 10 years. They have also capped the fund management fee at 1.35% per annum, though many Ulips are charging less than that on their short-term debt schemes.
The mortality charge differs across Ulips. Some plans offer either the sum assured or the fund value on death. These are Type I Ulips and their mortality charges go down as the fund value goes up. The Type II Ulips offer both, the fund value as well as the sum assured. Obviously, the mortality charges are higher when it comes to such plans.
ThoughUlips offer a cover to policyholders, the benefit may be a drag for those who are interested purely in investment. The low-cost Ulips are, therefore, Type I plans that will pay either the fund value or the sum assured. Here’s how itwill work. Suppose a person buys a Ulip with a `1 lakh premium for 20 years. The plan will give him a cover of `10 lakh (10 times the annual premium), but the insurance company will charge mortality premium for only `9 lakh since the total risk for the company is `9 lakh. With every annual payment of the premium, the risk of the company will come down, reducing the mortality charge. When the fund value of the Ulip exceeds the sum assured, the plan will stop deducting mortality charges and the entire premium will go into investment.
Another way to reduce the impact of mortality charges is to buy the policy in the name of your spouse or child. Income from investments made in the name of a spouse or a child are subject to clubbing provisions, but since the maturity proceeds from Ulips are tax-free, you don’t have to worry about that. You can also go for single premium Ulips, with an insurance cover of only 1.25 times the premium. However, the maturity proceeds of such a plan will not be covered under Section 10 (10D) and will be taxable in your hand.
SOURCE: TIMES OF INDIA
DATE : 6-10-2014