Hard Facts about New ULIP’s

February 14, 2011   ·   0 Comments



Lesson 7: Hard Facts about New ULIP’s

IRDA was under pressure to reform ULIPs and issued guidelines on how the new ULIPs should be structured. From 1st September this year, new ULIPs have made their appearance. Are they really the new, improved product they are touted to be? After 1st September, when the new regime of ULIPs commenced, the sales pitch of insurance agents is that charges have been reduced and, hence, the customer will benefit because more of his money will go towards investments. Financial planners are all over the business channels praising the reduced charges of new ULIPs. Well, here are some hard facts. We chose six examples of the old and the new ULIPs from different issuers to compare premium allocation charges and policy administration charges and found uncanny similarities in all cases. We assumed a premium of Rs25,000 in each case for the comparison. We discovered, to our utter shock, that the new ULIPs fare worse than their notorious predecessors! Although our comparison is for 10 years, many ULIPs have a term of up to 30 years. And things don’t get better when you hold them for a longer period; in fact, they can get worse. Effectively, customers are worse off than before. Look for yourself.


Lic’s Old & New ULIPs:


The Life Insurance Corporation of India (LIC), the big daddy of the ULIP market with a 73.27% share of first-year premium, thinks that all is well with the ULIP world. Vipin Anand, its chief of corporate communications says, “In little over one month, LIC sold 2,87,000 new ULIP Endowment Plus (plans) with first-year premium collection of Rs1,400 crore.” Given LIC’s formidable marketing muscle, its success with new ULIPs is not surprising. But customers are paying higher charges. The death benefit in the case of Market Plus I (Old) was the sum assured plus fund value. The drawback of LIC Endowment Plus (New) is that the death benefit will only be the higher of the sum assured or the policyholder’s fund value. It means you end up paying more in case of new ULIPs and get a lower death benefit! Charges are higher over both five and 10 years for the new LIC product. LIC’s fund management charges are lowest in the industry. Most insurers charge 1.35% per annum (p.a.), the maximum allowed by IRDA, but LIC has kept it down to 0.80% p.a. for old and new ULIPs. It does make a big difference over 10 years.

ICICI Pru’s Old & New ULIPs:


Madhivanan Balakrishnan, head of marketing, ICICI Pru Life, told  “If the policyholder stays with the investment for 10 years, the margins for the company that are lower on paper due to low persistency ratio suddenly look great. The customer who stays for 10 years will benefit from the Indian growth story.” 

According to our calculations, in five years or less, the insurer is still going to extract higher margins than those from the old ULIP. If the policyholder stays with the product for one or two years, the insurer does not benefit as much. This is because what was previously the first-year premium allocation is now spread over the life of the product. Also, the reduced surrender charges do not help the insurer. Considering both factors, the insurer is looking at ULIPs for long-term persistent premium collections from the policyholder, or a single premium product whose initial charges are more than those of the old single premium products in many cases.

The death benefit in new ULIPs, ICICI Pru Life Time Premier, is the sum assured and policyholder’s fund value. The death benefit in the old ULIPs, ICICI Pru Ace and ICICI Pru Wealth Advantage, was only the higher of the sum assured or policyholder’s fund value. Here, the new ULIP is better as far as death benefit is concerned. Charges are higher over both five and 10 years for regular premium policy. Are the additional charges for providing a higher death benefit justified?


Bajaj Allianz’s Old & New ULIPs:


The death benefit in Bajaj Allianz’s new ULIP Max Advantage is the sum assured and policyholder’s fund value. The old ULIP iGain II paid only the higher of the sum assured or the policyholder’s fund value as death benefit. The death benefit for the new ULIP is higher. But charges are higher over five and 10 years.

Bajaj Allianz iGain II touts a lower charge because it can be purchased online. We could not find a product brochure or any other data for Bajaj Allianz’s old ULIP because it has been taken down from the company’s website. This documentation must be made available for policyholders who may want to see the details of old ULIPs online, especially since existing policyholders could also continue with their old ULIPs for many years.

We found the iGain II brochure through a separate website created for it—www.buyigain.com. Santosh Balan, head of corporate communications at Bajaj Allianz, explains that the company removed old ULIP brochures from its website to “avoid any confusion.” He says, “Policyholders of old ULIPs can call customer service or the distributor. The policy document would also have all product details. The comparison with iGain II cannot be accurate because it is an online product with a different charge structure. Moreover, the new ULIPs have different benefits compared to the old ULIPs.”


Future Generali’s Old & New ULIPs:


It is the same story here. Charges are higher under the new ULIPs. According to Gorakhnath Agarwal, chief actuary, Future Generali India Life Insurance Co Ltd, “The charge in case of single premium product has gone up as withdrawing policyholders will not be paying any surrender/discontinuance charge. But ‘continuing’ policyholders are rewarded with 3% of policy value after six years. Therefore, we will be treating ‘continuing’ and ‘withdrawing’ policyholders equitably.” 

He adds, “Though for regular premium policies, total charges under the new plan appear to be more than those under the old one, their value for continuing and withdrawing members is almost identical when interest, withdrawal rates, mortality rates, etc, are considered. This again is to treat the withdrawing and continuing policyholders equitably. For regular premium policies, we were earlier offering reduced cover since the higher of sum assured and the fund value was paid out in the case of demise of a policyholder. Now, under Future Generali NAV Insure, in case of demise, the sum assured plus the fund value is payable.” However, investors should note that Future Generali NAV Guarantee (Old and New) ULIPs have a charge of 0.75% p.a. towards the guarantee—another way to inflate charges.

Source: Moneylife

Savvy’s View: I came across one of Fabulous Article by Moneylife. So, we continue to remain on our Stance that ULIP’s still are not fit for people for Investment or Taking Insurance as they don’t fit in either Picture. The ULIP’s can be only considered for an Option for Tax Saving when you need to do a Single Shot Tax Saving. At that time, Single Premium ULIP’s have an edge over Mutual Funds as they can diversify your Risk.

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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