Areas of consideration other than the charges in ULIP’s

POSTED BY ullas.jhunjhunwala ON April 13, 2012 2:16 pm COMMENTS (12)

Which areas, other than the charges, should we consider before selecting a ULIP? and also how do we analyse those areas?

For eg. In MF’s we look at who the fund manager is and his past performances.

12 replies on this article “Areas of consideration other than the charges in ULIP’s”

  1. ullas.jhunjhunwala@gmail.com says:

    Thank you everybody for your inputs, all your suggestion have helped me look deeper into the issue and have cleared a lot of doubts. And I’m a lot more closer to choosing MF+Term Ins over any ULIP

    @Ashal – Great difference between the two, IPru Maximiser stands at 65 whereas HDFC Top 200 is around 200.

  2. BanyanFA says:

    A few more:
    1. Insurance cover provided versus premium paid;
    2. Investment options available. most of them are having very limited options which do not allow to increase the component into risky assets to increase the returns;
    3. Flexibility to increase, reduce or stop the plan.

    Regards
    BFA

  3. ullas.jhunjhunwala@gmail.com says:

    @Ashal – Im starting off as an IFA and am making an investment plan for my clients child’s education and marriage requirement + his insurance cover. So I’m unable to decide between the two options

    1. Deepak R khemani says:

      There is nothing to decide, do not go for a ULIP if you have even a single doubt, go for it only when you are convinced there is no better option, the problem is you may not be sure of which fund option to choose, then that may or may not be the best performing fund in the years to come, also the switch option is the worst , what people may do is that when equity markets falls they may switch over to the debt option, remember equity losses can only be offset by gains in equity.

    2. Dear Ullas, a hard fact based upon the past performance of ULIP funds & MFs.

      One of the oldest ULIP is IPru’s Life Time & it’s Eq. Fund is Maximiser, launched on 10th Nov. 2001 @ 10 Rs. NAV.

      On the same date, HDFC Top 200 fund one of the consistent performer, NAV was 13 Rs.

      Now please look for the as on date NAV for both of these funds & post your findings here in this discussion.

      Thanks

      Ashal

  4. ullas.jhunjhunwala@gmail.com says:

    @justgrowmymoney – I compared the maturity amounts of SBI Smart Scholar (Child Policy) and MF+Term Insurance for a period of 25 yrs @ 10% rate of return and found that the IRR from SBI = 7.88% and that from MF+Term Insurance = 7.46%

    ULIP is also giving Accidental Benefit + Premium Pavor Waiver Benefit not the case with Term Insurance

    Assumptions:
    MF FMC = 2.25%
    Offline Term Insurance Charges
    ULIP calculation taken from its illustration on the website http://www.sbilife.co.in/sbilife/images/contentimages/smartscholar_bi.htm

    Considering these calculations I was convinced at least for this policy that if the funds give the same performance I will be better off going for the ULIP but since the details regarding the fund performance is not easily available I am in a dilemma.

    Mainly for reasons such as
    – Since the upper limit on FMC for ULIPs is 1.35% compared to 2.5% for MFs I doubt the quality of fund management will be that great, as a good fund manager and the team will be required to be paid well.
    – No source to actually measure the performance
    – No option to shift to other funds in case of poor performance (Eq fund of one company to another)

    ?

    1. Ramesh says:

      @ Ullas

      A 10% return scenario is just a paper-thing. Practically, it is dumb to expect such a return on any product on a linear basis.

      Why don’t you put 1.25% (Quantum long term fund charges that) or any other good sized well-performing funds (1.8-2.0% max).
      Anyways, these calculations have already been done on the ‘largest number of replies’ thread. Please go through it also.

  5. Dear Ullas, May i know the basis/background of your query? Why do you want to ask for Ulip as an investment vehicle vis a vis MFs?

    Thanks

    Ashal

  6. Charges are the most important consideration which makes a ULIP not so attractive an option.

    You can pull out the performance of the ULIP funds in their websites specific to your plan. That much is transparent. The actual scheme performance is hit because of the cancellation of the units you hold. The only charge that goes ‘invisibly’ into a scheme NAV is the Fund Management charge [exactly like it happens in a MF].

    One ‘selling point’ in ULIPs is that you can rebalance between various schemes (Debt, Balanced, Euity) and thus protect your portfolio from downfalls etc. This is PURE CRAP because if you are able to time the market so well you are way better off investing directly in stocks than considering ULIPs.

    The life coverage as we all know is pathetic as well.

    Even assuming a ULIP fund is able to generate 2-3% more returns than the top MF scheme the front loading of charges ensure that the final ULIP returns are below those of the top MF schemes.

    1. Chaitanya says:

      Below response is based on my research of child ULIPs only (I dont know how the charges/features etc. are in other/wealth ULIPs), so I’m specifically calling those CULIPs 🙂

      CULIP charges are not a big deal these days (probably after recent regulations). I got the specific figures from Kotak and SBI for typical age/amounts for “SBI Smart Scholar” and “Kotak Headstart Child Assure” products. Uploaded those benefit illustration docs onto google docs, links provided below.

      As you would notice in those, the differnce between “gross return” (i.e., return generated by fund w/o considering any charge) and net return (i.e., return after considering ALL charges), is 1.96% in case of Kotak and 1.19% in case of SBI. So 2% is the “total of ALL charges” (ALL includes mortality charges, FMC, PAC, service tax, PPWB, comission). One important thing to note in CULIPs is that “the charges” include Premium Payor Waiver Benefit (PPWB) charges – i.e., on death of insured, further premiums till end of term are paid by insurance company and fund value on maturity is paid to child – so this benefit is in addition to the “regular insurance” which is in the form of sum assured that is paid to dependent soon after the death of insured and I believe this is a huge benefit, ofcourse it comes with a cost but that cost is still part of that 2%.

      https://docs.google.com/open?id=0ByCJ_Rph_4zLX0hFV1I5bG8yRnc
      https://docs.google.com/open?id=0ByCJ_Rph_4zLdjYwYVpOX2RhQkU

      Seems the 2% charge paid for getting the above benefits/insurance is reasonable: Even in case of MFs, you would pay 1.5-2.5% just for FMC and you wont get above 2 forms of insurance in MFs and have to take term plan separately there. Ofcourse, “this CULIP charge” depends on product-to-product so I dont mean to generalize all CULIPs, but above 2 different companies are very good examples I hope.

      So having covered the charges part, the main disadvantage in CULIPs as far as I know is that you dont have the luxury of choosing any fund (you can only choose among the 5-10 options for equity/dect/combo that company offers). So if the equity funds underperform for quite a few years, thats a loss; if we compare MFs in that scenario, you can just stop SIP in underperforming one and then start a new SIP in new MF. But if you stop CULIP, you lose a lot (since some charges like PAC are still front-loaded and you wont get insurance-coverage). Flipside to it: you’ve the advantage of switching between equity and debt, you can do this just based on index levels (but still not that easy), but you atleast dont have to get into stock specifics to do this.

      Disclaimer – I havent taken any ULIPs/CULIPS so far. Till now, followed MFs + Term combo only. But considering to take a CULIP, so analyzing and brainstorming on it till I’m thoroughly convinced.

      – Chaitanya

      1. Ramesh says:

        Aegon religare requires Rs. 3000 per year, for insurance of 25 lakhs, for a period of 20 years. And this amount is probably just what you are paying as the premium allocation rate (6% for 1 year, 3% for 2-5 years and 2% thereon) in Kotak’s plan (which I could downoad, the other is not available). Anyways, go through the longest thread on this forum too, in case you have not gone through it.

        Ramesh

  7. Ramesh says:

    The other things, like fund performance and other stuff, is not easily available. Plus, lot of schemes are churned into newer names, so that also makes it difficult to track, which is which.

    There are no easily available data to check who are the managers and their experiences. Some companies used to outsource the actual fund management part to the MF-AMCs (i remember something like this was done by Templeton AMC), but still the details are hazy.

    Also, it may be that the fund has performed well, but because of the ‘unit-cancellation’ method, the overall value of your portfolio has underperformed as compared to a same-return MF.

    Maybe some Ulip advisor will be able to provide more easily available data.

    Ramesh

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