In your interest.
Online Personal Finance Magazine
No beating about the bush.
New ULIPs have a big ticket size. But Bajaj Allianz has come out with a small ticket plan with high charges
Money Secure is a regular premium ULIP that provides security for your investment with guaranteed maturity benefits. The selling proposition is a minimum annual premium of Rs7,000, which is low compared to premiums for new ULIPs that are commonly high.
The maturity guarantee of net cash flow (premium paid, less all charges) accumulated at 3% per annum is pathetic and will result in investments mostly in the debt market. The equity allocation of 0% to 50% means there will be times when nothing will be in equity and hence the returns will be average.
Pension ULIPs like LIC's Pension Plus offer 4.5% per annum guarantee on gross premium (not net of charges) and are a far better option for conservative investors than the Money Secure plan. Most insurers have avoided pension ULIP products since the new regulations, even though the 4.5% per annum guarantee does not seem much, because of the uncertainty of interest rates over the long term of such plans.
Money Secure has premium payment term (PPT) flexibility. For a policy term of 10 years, it is 5 to 10 years. For a policy term of 15 years, it is 10 to 15 years. According to Rituraj Bhattacharya, head - product development, Bajaj Allianz Life Insurance, "The policyholder has to make an informed decision about how long s/he wants to pay the premium. If the premium payment term chosen is 12 years for a 15 years policy term in Money Secure plan, then the premium payment obligation on the part of the policyholder ceases on payment of the 12th year's premium and the policy will remain in force for 15 years." PPT flexibility will help to continue the insurance cover and remain invested without paying premium after the period of PPT till the end of policy term.
The premium allocation charge is 10% for years one and two, 7% for year three through year five and 2% thereafter. The policy administration charge is nil for the first five years of the policy and Rs25 per month thereafter, inflating at 5% per annum annually. There is also a guarantee charge of 2% of premium when received by the company. All top-up premiums have an allocation charge of 2%.
The plan also has seven optional riders. There is an option to decrease the sum assured to the level of 115% of the regular premium paid, subject to the minimum allowed under the product; such reduction shall be allowed at policy anniversaries only.
The minimum sum assured for age less than 45 years is 10 times the annualised premium and seven times the annualised premium for others. The maximum sum assured is 10 times of the annualised regular premium for policyholders who opt for riders such as critical illness, hospital cash benefit or family income benefit and 20 times of the annualised regular premium for others.
Push products like ULIPs when sold online to net-savvy investors, without agents, aim to reduce costs. But while costs are lower, the fund performance can only be evaluated over time
If you are looking for a regular or single premium ULIP with low charges, you could consider a new online product that has been launched recently. Aegon Religare's iMaximize offers the single premium option. However, the regular premium option does not have premium payment term (PPT) flexibility and the policy terms are 15/20/25 years. So, if one is looking for the flexibility to continue the cover without paying the premium after a specific number of premium payments, this may not be the right product.
Another new product is Bajaj Allianz's iGain III. With this, a customer can choose a PPT of five years or up to the full term of the policy. The insurer will accept premium payments only till the PPT that is decided by the policyholder and continue the cover till the end of the policy term, as long as the premiums till PPT are paid.
Both the products are designed to be sold online and without agents so as to reduce costs for net-savvy investors.
Online ULIPs -
iMaximize allows only four switches on investment options in a policy year. Beyond this, there is a minimum charge of 0.1% on the amount switched or a flat Rs500 for every extra switch, subject to minimum amount of Rs100 switched. iGain III allows unlimited switches with no extra cost.
iMaximize offers the trigger portfolio strategy and the self-managed portfolio strategy. The equity component in one of the self-managed portfolio strategies (accelerator fund) is 80% to 100%. The trigger portfolio strategy moves from equity to debt periodically and will limit the returns.
iGain III offers investors a selectable portfolio strategy and the wheel-of-life portfolio strategy. The maximum equity component ranges from 60% to 100%. The wheel-of-life portfolio strategy will reallocate your fund value among various funds in the proportion based on your outstanding years to maturity. It is fine for conservative investors, but the move from equity to debt will limit returns. Moreover, such a move at the wrong time in the equity cycle will not benefit from an equity upside.
iMaximize does not offer any rider, while iGain III offers six different riders at an additional cost.
Life Insurance Corporation of India has launched a new product, Bima Account, which offers liquidity, flexibility, transparent charges and guaranteed returns. But its performance has got to be among the worst, as you will make a capital loss for more than nine years
Can a guaranteed return of 6% a year land you in a situation where you make a loss over nine years? Yes, if you buy LIC's newly launched Variable Insurance Plan (VIP) products Bima Account-I and II.
The ads for these products are all over the print media. LIC is splashing full-page ads in The Times of India and other publications. According to the ad, the product guarantees returns of at least 6% per annum. Unfortunately, the ads conceal the most toxic aspects of the product.
While a guaranteed 6% per annum is prominently advertised, there is no mention about the astronomical charges and the simple fact that 6% per annum is on the investment, net of all the charges! The charges are astronomical-27.5% in the first year, 7.5% in the second and third years and 5% each year thereafter, of the premium paid.
The premium you pay for 10-15 years (policy term) of Bima Account-II will break-even in nine years even with a guaranteed 6% per annum for a policyholder of age 45 going for insurance of 20 times annualized premium. What might save the day for Bima Accounts is a hefty bonus from LIC.
At this time, LIC is not willing to comment on the bonus factor. The bonus will be given only if the policyholder pays the premium for the policy term even though the lock-in period is only three years. Remember that while the low returns are "guaranteed", the bonus is not.
If you have to depend on a bonus to do better than only breaking even in nine years, you are taking an investment risk. The irony is that these plans are targeted for conservative investors. The Bima Account products are obviously timed to attract naïve customers during the tax-savings season-the very customers who are in a hurry to shove in up to Rs1 lakh in some financial instrument to get 80C tax savings. Thanks to LIC's mighty network, which gives it a presence in every corner of the country, it will rake in the money, but at what cost to customers?
There are far better plans than the Bima Accounts. Like the traditional plan ICICI Prulife GSIP which gives real 5% guaranteed returns on your investment rather than the surreal 6% guaranteed returns from LIC's Bima Accounts. Moreover, GSIP will also give a bonus. A conservative investor looking for 80C savings would be better off putting money in PPF or opening a five-year tax-saver FD that offers interest up to 9.25% per annum. (IDBI Bank offers this rate today). As such, the funds in LIC's Bima Account cannot be withdrawn during the lock-in period of three years even if you discontinue premium payment. The insurance need can be taken care of by a term plan.
It took the Insurance Regulatory and Development Authority (IRDA) a long time to ban the Universal Life Plan (ULP) that was rechristened as the Variable Insurance Plan (VIP). How did it clear this product and the advertisement? Will IRDA be caught napping this time too?
The Bima Accounts offer you the flexibility of reducing the sum assured during the term of the contract, subject to a minimum limit. When the sum assured is reduced, such change will be effective from the policy anniversary following the date of request. The premiums can be paid regularly on a yearly, half-yearly, quarterly or monthly (through ECS mode only) basis over the term of the policy. The minimum premium is Rs600 per month through the ECS mode for Bima Account I, while it is Rs1,250 per month under Bima Account II. The minimum yearly premium for Bima Account I is Rs7,000 and Rs15,000 for Bima Account II. The policy term for Bima Account I ranges from five to seven years, while it ranges from 10 to 15 years for Bima Account II.
There is an option to pay additional (top up) premiums without any increase in risk cover, to the extent of total basic premiums paid under the policy. A loan facility is also available immediately after the first policy anniversary.
If premiums are not paid within the grace period, the policy will become a paid-up policy. The policyholder has the option to revive the paid-up policy within 12 months from the date of the first unpaid premium. During the revival period, the life cover will cease and no mortality charges shall be deducted. The balance in the policyholder's account during the period of revival will earn guaranteed interest rate of 5% per annum without debiting any expenses. On revival of the policy, the guaranteed rate of interest on the policyholder's account will again be 6% per annum from the date of revival.
The sum assured under Bima Account I ranges from a minimum of 10 times the annualised premium to a maximum of 20 times of the annualised premium up to the age of 35 years, 14 times of the annualised premium for between 36 and 45 years of age and 10 times of the annualised premium for between 46 and 50 years of age.