The combination of mutual fund/s and a term plan leaves you with a corpus higher than that of the Ulip
by around Rs 1 lakh.
You keep hearing about a combination of mutual fund/s and a term plan being a better option than unit-linked insurance policies
(Ulips). The former, as financial planners say, works out cheaper as the charges involved are only those for fund management and mortality. In an Ulip, however, there are charges on allocation, policy administration, mortality and fund management.EXPERT VIEW: How to choose the best Ulip to invest in
However, have you ever done a little calculation to check the veracity of such assumptions? To do a reality check if the suggestion still holds water after the new Ulip regulations, we decided to do some mathematics. For our calculation we have made the following assumptions:
Since insurers pitch Ulips as long-term investment options and they claim that one can reap real benefits only if he keeps investing for 15-20 years, we have based our calculations over 20 years.
As mortality charges
are agespecific and depend on the sum assured, for sake of convenience, we have taken into consideration charges for insuring a 30-year old healthy male with a Rs 50 lakh cover. For the 30-35 age group, mortality charges are close to Rs 1.5 for every Rs 1000 sum assured.Allocation charges
in this case have been 4% for the first 7 years and 1% for the rest of the tenure (20 years). Policy administration charge
(PAC) is 3% on the first year with a subsequent 5% rise every year till it reaches 4.8% every year.Fund management charges
(FMC) have been taken at 1.35% (the highest permissible rate) every year in case of Ulips and 2% in case of mutual funds. While actively managed equity mutual funds charge up to 2.5% FMC, index funds charge up to 1.5% for fund management. Therefore, we have taken an average 2% FMC for mutual funds.
Ulips v/s Mutual Fund + Term Plan
We have taken the annual premium for the term plan for a Rs 50 lakh cover as Rs 4,436, which is the cheapest option available in the market right now.
The annual premium in case of the Ulip and the initial investment for the combination of mutual fund/s and a term plan is Rs 1 lakh. We have further assumed an annual growth of 10% for the investment corpus in both scenarios.THE RESULTS
Our calculations show that the combination of mutual funds and term plans works slightly better under the conditions assumed by us. For the first 10 years, the combination of mutual funds and a term plan leaves you with a corpus of Rs 14,78,277 against Rs 13,96,359 corpus in the Ulip during the period.
After the full term of 20 years, the total corpus built through the mutual fund/s and term plan combination is Rs 46,11,155 against Rs 45,15,553 through the Ulip. In all the above instances, the combination of mutual fund/s and the term leaves you with a corpus higher than that of the Ulip by around Rs 1 lakh.WHAT IF...Mutual fund FMC is 2.25%:
Keeping everything else same, if the mutual fund FMC is raised to 2.25%, the total corpus through MF+term plan combination drops from Rs 46.11 lakh in 20 years to Rs 44.62 lakh, lower than the Ulip corpus of Rs 45.15 lakh.
Mutual fund FMC at 1.75%:
|The combination of mutual fund/s and a term plan leaves you with a corpus higher than that of the Ulip by around Rs 1 lakh.|
The total expenses come down from Rs 8.50 lakh under the original set of conditions to Rs 7.69 lakh. As a result the corpus built through the MF+term plan combination at the end of 20 years rises from Rs 46.11 lakh to Rs 47.65 lakh compared to Rs 45.15 lakh in case of the Ulip.Ulip FMC decreases to 1%:
Keeping everything else same, the corpus built through Ulips over the 20 years increases to Rs 47.30 compared with Rs 46.11 lakh in the MF+term plan combination.Opt for offline term plans:
The cheapest offline option available in this category is a plan with a yearly premium of Rs 6,149. In this case, the MF+term combination leaves a corpus after 20 years is Rs 45.36 lakh compared to Rs 45.15 lakh through the Ulip.
Even as our calculations show a MF+term plan combination scores over a Ulip in the long-term, the dice is delicately loaded in favour of the former. Any slight change in charges can shift the balance in favour of Ulip.