COMPARISON ULIP AND MF+TERM

POSTED BY Jig ON December 17, 2010 2:23 pm COMMENTS (20)

HELLO ALL ,

I REQUEST ALL EXPERTS IF THEY CAN SHOW HERE THE COMPARISON BETWEEN ULIP AND MF+TERM PLANNING. SPECIALLY AFTER NEW IRDA RULE IN SEPTEMBER. IT IS HIGHLY VALUABLE TO MANY OF US IF THERE IS ANY PRESENTATION INCLUDING CALCULATION SHOWING WHICH ONE IS BENEFICIAL TO COSTOMER END.

I HAVE REQUESTED THIS TO SO MANY TIMES ON THIS FORUM IN DIFFERENT BLOGS BUT STILL THREE IS NO UPDATE ON THIS ISSUE.

HOPE THIS TIME SOMEONE WILL LOOK INTO THIS.

THANKS IN ADVANCE.

20 replies on this article “COMPARISON ULIP AND MF+TERM”

  1. jignesh says:

    Hello all experts

    Here i am attaching one product and need help from you guys on that.

    https://spreadsheets.google.com/ccc?key=0AvC-G_eD-LvodGZ2ODd0RXdKYmVDc3psa09meEhPNnc&hl=en

    My intention was to get 50 lac SA with giving 5 premium only

    TATA aig offerd me a unique plan with one time investment of 5 lac. they will deduct from it yearly 33000 as base premium and on remaining amount they will give 7 % interest just like FD till 5 lac invested ( said 15 years) It is also somewhat like moneyback plan.

    I am getting 56 lac SA

    Additionally from very next year i will be getting 21780 for 2 years and thereafter 43560 for whole life. i can take loan upto 30 lac from this insurer too.

    I am confused as how i can compare this with term+MF senario and which will be beneficial.

    please provide your 2 cents on this.

    Thanks & Regards

  2. jignesh says:

    Thanks to all experts and really happy to see detailed pros and cons discussion from experts.
    As manish recently put a blog for term plan comparison, can you expert guys or manish put the best ULIP plans here as blog. Reason behind asking to experts is they may know the exact benefits of ULIPS which normal broker/advisor missed while showing to customer.

    Thanks once again to manish to provide platform for learning and sharing knowledge.

    keep sharing

    JIG

  3. Ganesh Babu says:

    Surely, we have a good number of experts here! I think the analysis is much deeper and in detail in comparison with mine!!

    But the point still is that ULIPs does not suit all and it is one hell of a difficult product to understand (for the common man). And we are still in an era where premiums are more important than sum assured, and long term is like 5 years!! The premium for a decent sum assured in a ULIP will be prohibitively expensive and could well go above the 80C limit (a psychological imaginary limit, i would say). 6 months into a equity linked product and if the market is down, people consider it as a “loss”. Till collectively our knowledge on these improve and products like ULIPs are simplified (which has improved, by the way), ULIPs are a strict no for most (this is my opinion).

    Another important point to consider is the fund’s (fund house’s) perfromance. More than half the funds that i have come across (in the ULIP category) are underperforming in comparison with the benchmarks and MF peers. It could be that these are conservative in comparison (considering the “long term” nature), but still.

  4. Ramesh says:

    @Shashank,
    If you go through the excel sheets I have provided. For first 10 years, I have removed the insurance money first, and then invested the amount. Also for the next 20 years, I have removed the insurance amount first from the previous year’s total MF, and then calculated the returns. Check it out!

    Regarding the other aspects of the ULIP (waiver of premium etc), there are definitely some advantages in a ULIP (the single most important being the discipline it provides, a forced saving) but you have to be very savvy (most are not) to take advantage of the “internal leverage”.

    Also, the major contention for me is apparent difference in the life insurance premia by the same company in a ULIP and the corresponding pure term insurance. That there can be a large upward revision of the FMC and policy admin charge during the term of the policy is another major problem.

    Ramesh

  5. shashank kashettiwar says:

    @ Ramesh,
    Your point no 4 in above reply. You cannot exactly replicate the way ULIPs charge mortality charges in a term+MF combo. In a ULIP, the yearly charges are broken into 12 parts and mortality is charged on every monthiversary starting from the day the policy is inforced; like in any insurance contract. (You pay the money first and then only the cover starts.) You will have to split the ULIP premium into term+MF combo at the start of the year only. You cannot put money into MF and then withdraw from it at the year end.

    Still if you wish to do so and want to pay the premiums on monthly basis then,there is an interest element to be added; which is 8%! Also there are some minimal amounts below which this premium payment is not acceptable. So mostly for low covers of 10 lakhs or so through a term plan the premium would not be paid/accepted below semiannual mode(4% intt). For high covers you can create/have monthly mode but it will entail 8% more premium than the yrly mode.

    I don’t know whether you are factoring in these facts. Just felt that probably you are not.

    And these are definitely some finer advantages available in a ULIP product’s structure. I call all such (and some other) benefits collectively as ‘internal leverage’ of a ULIP; which is not available in an ‘external leverage’ type scenario of term+MF combo.

    shashank

    1. shashank kashettiwar says:

      @ Ramesh,
      My response on your reply to Ganesh Babu’s initial write up was done in a haste. I had just posted my previous comment when I saw your reply to GB. I just glanced through the points and that point4 caught my eye. I thought you could have dealt with some aspect inappropriately and I just rushed into writing again thinking that you would be online and will be able to make any necessary changes quickly.
      But it is apparent now that you had taken proper care of the issue I was pointing out even without looking at the excel sheets workings.

      Now when I started looking closely at GB’s and your comments it dawned on me that this plan presented is nothing but sort of BIrla Dream Plan………..old wine in a new bottle?

      I’m pasting the link to my comments on this type of plan under a querry on the forum.

      http://localhost/jagoforum2/query-about-birla-sunlife-dream-plan/779/

      These type of ULIPs are not a proper representative of the ULIP product universe. They are kind of ‘phony’ or ‘pseudo’ ULIPs.

      As I have said in the above comment, term+MF combo is a prefferable choice than the Birla plan, if WOP has not been opted.

      Ramesh ,would you kindly work out the Excel for I-Pru’s ‘Life Time Premier’ product for same age ,similar premium and similar cover multipler of @ 50x ?. If you can’t get the illustration for it ,tell me, I can send it.

      Here we will be able to see the effect of the ‘internal leverage’ more powerfully. Actually it is quite easy to explain it to a client if you know how to present it properly. Even if the nitty gritties are not known still it doesn’t matter if the general benefits derived from it are principally understood.

      The last point you have mentioned about extending the term of ULIP in case of a bear phase- yes it is made possible incase of ULIPs. It is called ‘settlement options’. You can keep the money parked and withdraw it in installments over a spread out time span! The I-Pru’s plan is with such options.

      As my browser is not allowing me to see the google docs spreadsheets beyond a few seconds, I still haven’t looked it closely. But I’m sure the picture would be vastly different with a ‘true’ ULIP!!!!!

      shashank

      shashank

      1. Ramesh says:

        @Shashank

        Actually, I tried to get the IPru’s illustration but could not. Please send it to me via mail/post it.

        The points that I want to make are:
        1. ULIPs are not super-bad (as have been made out everywhere). What makes them bad is that the knowledge to use the product is not there in most of the investors, and most of the agents/advisors. So it is better to avoid such a complicated product. “Do not invest in what you do not understand”. If you can explain the nitty-gritties of the product, it may prove to be very beneficial for us.
        2. Getting a long term product is like buying a house for yourself. You need to have to invest a lot of effort to understand and search. But most of the people jump into a long term product as if buying a pizza. Well, regular pizza-eating is not good for health!
        3. Please elaborate on “settlement options” as well as “the waiver of premium”. How do these help. Any more important “internal leverage” options that a true ULIP has, please elaborate on them too.

        Thanks
        Ramesh

  6. shashank kashettiwar says:

    @Ramesh,
    Not only most of the agents, great many number of employees of the insurance companies also are not properly aware about their product features in details. I will share an incident in my professional life which happened a few yrs back.
    The prospect-28 yrs old, I had met for selling insurance was not contacted by me for a fortnight.For a budget of 25000 I had suggested a cover of 30 lakhs i.e. a multiplier of 120X in ‘Life Time’. This person was approached by another agent from the same company-I Pru. This guy told the prospect that the kind of multiplier I had suggested was not available at all in this wealth creation product. He said that the agent whom the prospect had met i.e. me, must be a fool! To prove his point he further told that he himself has this product at a 10X multiplier and a term plan to cover the insurance needs.! As this prospect was not ready to believe him as I had told him something else altogether, this agent told him that he would make his sales manager call from the branch office and remove this doubt once and for all. The sales manager called the prospect and repeated what the agent had told the prospect. Now this guy was totally convinced that what Shashank had said was a definitely foolish and wrong thing!
    I happened to give this guy a call next day when all these things had happened. He was really off with me on phone. I was surprised and asked him to meet me just to pacify him. When we met he shared all these details. I said see sir, the commission earned are based on the premium and not the cover you choose. So if I was telling that you can get this much of multiplier, was my commission going to be more? And if the company is not allowing this kind of multiplier then they would simply refuse the proposal and in that case I won’t be earning anything at all, so why would I mislead you?
    We applied, there was a due medical done and the proposal got inforced in due time!

  7. Ganesh Babu says:

    Here is a post on my blog on ULIPs: (may be it can provide some answers)

    I was recently approached by an insurance agent with a ULIP. Even though I was not willing to take the policy, he wanted to present the plan and get my feedback.

    The plan in question is Birla Sun Life’s Classic Endowment Plan . The basic sum assured for the plan presented to me was Rs.3,75,000. But paying an extra premium I can get the life cover enhanced to whatever I prefer. In this case, we took the enhanced sum assured as Rs. 18,00,000. Policy paying term is 10 years (I pay for only 10 years) and the policy term is for 30 years (I get cover for 30 years). For a 33 year old male, the annual policy worked out to Rs.36,538. (total pay-out of Rs.3,65,380)

    If the life insured survives the term, the maturity benefit will be the Fund Value at maturity.
    In the event of the death of the life insured prior to maturity, the nominee will receive the greater of either the Fund Value or the Basic Sum Assured (provided there are no partial withdrawals)
    Policy can be surrendered after the completion of five policy years, and receive the Fund Value at that time.
    To analyse this I put this in an excel sheet and compared it against a term plan + any other investment (with returns same as that of the sales illustration, which was 6%).

    Term plans rates have come down drastically these days with Aegon Religare and ICICI Prundential launching aggressively priced products such the iTerm and iProtect. For a 33 year old non-smoking male, iProtect provided the lowest quote of Rs.4,660. After considering service tax, cess, etc. let us take the annual premium as Rs.5,400. This needs to be paid each year for 30 years.

    The remaining amount (Rs.3,65,380 – 30 x Rs.5,400) of Rs.2,03,380 is equally divided into 10 yearly instalments and invested in say an equity mutual fund returning 6%. I have not considered any expense charges the returns for Classic Endowment Plan is shown at 6% gross returns.
    If the life insured survives the term, the maturity benefit will be the Fund Value at maturity.
    In the event of the death of the life insured prior to maturity, the nominee will receive the Fund Value plus the Sum Assured
    Policy can be surrendered any time to claim the Fund Value at that time.
    The illustration of the two cases is provided in this excel sheet (http://bit.ly/gdpNsz).

    The result is not very surprising. Term plan plus mutual fund is still better than the ULIP. But an interesting thing is that the difference after 30 years is not much. In fact, till around 22 years the ULIP fund remains better. Of course, the death benefit is better for term plan plus mutual fund as the death benefit will be the Fund Value plus Sum Assured.

    But the point that I want to make is that ULIPs have changed (in fact still changing) for the good. For those averse to “zero returns” insurance plans can consider cost effective ULIPs like the Birla Sun Life Classic Endowment Plan to get dual benefits of sufficient life cover (especially for longer terms) and decent equity returns.

    1. Ramesh says:

      @Ganesh

      It is a good effort on your part, and thanks for providing a link to the excel sheet as well.

      But there are some flaws (I agree it is easy to find flaws in any analysis!), as below:
      1. The online term plans are better for high life cover values and not low values (<50 lakhs). For eg, for a non-smoking male of 33 years, and term cover of 30 years. Kotak Preferred term plan (not e-term) gives you a premium of Rs. 4467 per year, inclusive of all taxes. (=much less than Rs 5400 by iProtect). By the way, 4467 is less than the mortality charge levied by the BSL endowment plan (which actually charges Rs. 4549 per year throughout the term every year. Even without the Waiver of premium option enabled).
      2. Another problem is that the 6% and 10% return scenario do not work in actual life. No market (bond or stock) provides a linear return over long periods of time. Though that is not important for the discussion.
      3. Still for discussion sake, lets have a 6% return. The way you have put money in MF+term is also not the right way. Why would I calculate the whole term amount now and deduct it. If I would want to do it, why not buy a single premium policy (which by the way for the same kotak plan is Rs 66,731. Then I would put first two years whole money into buying that policy and rest of the money in MF for the next 8 years.
      4. Better idea is to compare apples with apples only. So put 36,548-4467=32,081 every year for 10 years, and then from the MF amount, simply withdraw 4467 every year for the next 20 years. (This is the way ULIPs do it).
      5. Also deduct 2.5% FMC every year from the MF amount.
      6. Lastly, also have a 10% analysis scenario.

      For a 6% growth and 2.458% FMC. That way, in the 30th year, the ULIP takes over the MF-term. http://bit.ly/gr0cAu

      For a 10% growth and 2.0% FMC. That way, in the 30th year, the ULIP takes over.
      http://bit.ly/eDPEVc

      Though I have manipulated the FMC to favor the MF, the important thing is that in no year in either of the scenario, the death benefit of the MF-term combo less than of ULIP. Remember, insurance is primarily for that purpose only. Also, it is better to have a low expense ratio MF (large corpus good performing funds have actually about 1.8-2.2% FMC).

      One more thing, an investment in a ULIP cannot be extended beyond the term period. So if you have not shifted to a debt plan in the last few years and there is bear-phase, the entire fund value will get hit. In MF, you have the option and flexibility of extending the investment period.

      Ramesh

  8. shashank kashettiwar says:

    I pru’s products have always been reasonably priced. I like Life Time Premier more than the other one.
    Whatever blemishes we can put on agents of I-Pru for leading the misselling brigade very aggressively, but the company was having amazing products and very transparent ones. The illustrations(the official ones!) were reflecting exactly the way a product would work. There was nothing hidden at all.
    Their original Life Time was a beauty! We will never see such a plan again! And so many people are having this plan in their portfolio without realising its power even today! They erroneously buy extra term plans to increase their insurance covers, which can be very well done through increasing it many many fold in a existing product in their portfolio; whose initial allocation charging is also been already done!!!!

    But who will educate them? (Certainly not those fellows who think ULIPs are no good at all!!!!)

    shashank

  9. Yes, I agree with Shashank

    Incase some one wants to compare the ULIP and MF+Term combo , What I would suggest is to go back to history 5-10 yrs and then dig out all the data and see how the history performed , take 1 lac and see how it would have grown if it was actually invested in variety of plans and see which wins .

    It would lead different results for different person based on the switching decisions and also the costs of different plans .

    Manish

  10. shashank kashettiwar says:

    Analysing term+MF combo through tool like Excel is possible but how can a lay person analyse ULIPs through Excel? Are we even equipped with proper knowledge to do so? Those are actuarial calculations. Beyond our means and ability to comprehend and calculate. At most what we can do is take out an ULIPs illustration of the insurer for a particular premium and cover. Then try to compare it with a term+MFcombo cash flow at various time horizons. Actually that term plan’s premium design is also a complex actuarial exercise. This premium also carries a mortality part, expense part and an investment reserve or a savings part(which is not available to us but to the insurer only). So strictly speaking on both sides of this comparision i.e. term+MF and ULIP the actuary only controls who can win. The MF and the ULIP are investing in the same asset class so the asset class returns can’t be different. FMC charges are comparable and can be made same. The only difference can happen because of 1) the increasing and level mortality charges principle being applied on the two sides–which results in ULIP working more powerfully and 2) the expenses incurred–chiefly commissions. The trail commissions of MF charged on the fund value are effectively much more than the commissions in a ULIP based on the premium amount only. So if these expenses are also low–as it is now or if these expenses can be made low by taking a sufficiently high cover and spreading the expenses over more cover, then it is not difficult to realise that ULIP has to win.

    1. Ramesh says:

      @Shashank

      I would like to have the details / name of the plan(s) which is(are) able to provide a 40-70x life cover + reasonable charges.

      Thanks
      Ramesh

      1. shashank kashettiwar says:

        @Ramesh,
        ICICI-Pru,Metlife,Birla,Bajaj, atleast all these companies, at age 30 were having plans with cover multipliers of 100 and above a few yrs back(2006). At age 40 also multipliers were 50 and above. I -Pru had a 150 times cover at age 30 in ‘Life Time’ and 100 times at age 40. At that time even LIC’s ulip- named as Market Plus I think, was offering a 50 times multiplier at age 40. And remember this period was sort of peak period of ulip missselling.

        As on today I haven’t checked with other companies but I-Pru for sure has a multiplier of 70 times at age 30 and 35 times at age 40 in their two products- Life Time Premier and Life Time Life StageII. Both are type II ulips i.e. death benefit is SA plus fund value- again a very good multiplier in a type II product.(Type II products work more like an asset, Type I product works more like a hedging mechanism, i would say)

        With reduced charge structure even a multiplier of 30 and above should give a fair deal. Even LIC’s current plan, Endowment Plus gives a multiplier upto 30 times. Very fair as their FMC charges are just 0.8% and mortality charges at age 30 are also within a reasonable bracket. Actually those fellows who trust LIC only and buy term plans from them only even though very expensive, should buy LIC ulips instead of term+MF combo(The funny thing is they won’t be buying equity MFs of LIC at all!!!!). With time LIC is also on the path to improve their fund management ability in the equity space, which they are quite good in the debt space.

        Birla Sun Life could be having a good multiplier product as they predominantly offer ULIPs. And their rider range must be the widest available for ULIPs in the industry I think. They have a good offerings on waiver of premium rider side. Many companies have stopped or never offered this rider on the ULIPs.(LIC doesn’t offer it on traditional plans as well. They simply don’t have this rider as a add on, but only built in in a few products)

        Well, I have drifted away a lot from answering your simple question but hope it is useful info.

        shashank

        1. Ramesh says:

          Thanks a lot for this info.

          Even most of the agents are unaware of all this, or they do not want to share!

          Ramesh

  11. JIgnesh

    What part stops you to do it yourself . where are you stucking while doing the calculations yourself ? OR you didnt try it ?

    Manish

  12. Jagadees says:

    @Jignesh
    Both pros and cons of ULIP as an investment has been discussed in lengthy in many of the previous questions in this forum. In search box – just type “ULIP” where u will find lot of discussions on the topic like – ‘child Plan ???? Why Not !!!’, ‘ULIP vs ELSS’, ‘ICICI Prudential LifeTime Super (ULIP)’ etc.

    Regards
    Jagadees

  13. Your question is incomplete. You didn’t mention your age, S.A., tenure, company name, premium amount, comparison with ULIP plan name, premium, tenure, etc.

    It’s not so difficult like it seems. You can do it yourself. Just calculate the premium of term insurance as per your need from online calculators on life insurance companies. Mutual fund calculators are also given on number of sites like http://www.investmentkit.com/mutualfunds/index.shtml

    Start doing some homework. We’re here to help you if you stuck in between.

    Hope it will help you

  14. jignesh says:

    So No one is there to give their views on this?

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