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>Alice in Ulip-Land
>What experts see in Ulips
>The long haul
>What Ulips are all about
>Ulips of the future
>How upfront charges help
>Ulip strategy for all markets
>Cover drive

No two fingerprints are identical. Likewise with Ulips. They might seem similar to a lay investor, but each product comes with different benefits. To know what suits you best, you must begin by finding out what you need. Then you should look at the plans available and make your choice. If you don’t know what you need, you could end up paying for something that does not suit you.

The first and the most important reason for you to buy Ulips is insurance. Look at the types of covers on offer, compare the policies that provide only death benefits (higher of the sum assured and unit values) or only net asset value, or both. “The costs and premium allocation varies for products that offer both the sum assured and unit values, those that guarantee capital and those that offer higher of the sum assured and unit value,” says Vishal Gupta, associate director, marketing, Aviva Life Insurance India.

Depending on your risk profile, you can opt for a product that offers only death benefit or capital guarantee or a combination of death benefit and unit value or only unit values. Comparing two Ulips should start with comparing the type of death benefits they offer, which is the amount that your dependants will receive if you were to die. Also check the mortality charge, which is the cost of insuring your life that you pay to a life insurance company.

Arun Rastogi, 45 Insurance cover: Over Rs 30 lakh “Cost of switching between equity and debt funds would make me think twice. In Ulips, switches are inexpensive.” A market regular who invests in stocks and mutual funds, Delhi-based Rastogi has over half-a-dozen Ulips across insurance companies with varying premiums, sums assured and maturity tenures. So far he has managed to time the markets well, switching from equity to debt in late 2007, just before the stock markets went into a tailspin.

Once you have the insurance angle covered, move to investment. What are the fund options available? Most insurers offer you a choice between equity and debt funds, though some offer a balanced fund. Other companies offer variants of these, adding to more possibilities. Says Puneet Nanda, executive vice-president and CIO, ICICI Prudential Life Insurance: “The choice of fund type helps one select a fund closest to one’s risk profile. The choice to shift funds is an important feature when comparing funds.”

A wider choice of funds acts as a better investment hedge, says Delhi-based Arun Rastogi. “When I was sold a Ulip in 2004, there were only three funds to choose from. However, last year I picked a Ulip from another company because it offered me a choice of five funds,” he says. The combined effect of fund switches and fund choice meant that Rastogi did not suffer a loss on his Ulips, even as the value of the rest of his portfolio has fallen by 20% in the past eight months.

Now for the charges. Insurers have their own versions of why they charge different amounts for premium allocation, fund management, policy administration and the like. Some levy charges annually, others monthly and several are fixed charges that vary from year to year. This is why the Insurance Regulatory and Development Authority (Irda) has standardised the policy illustration across all insurers. This helps in calculating and comparing policies more objectively. “The death benefit, surrender value and fund value at the end of any given month or year, besides the 6% and 10% illustration, is a good point to start with, as investors can understand how the investment component grows with time,” says Nanda.

For more evolved investors, a fund’s benchmark is a better measure of its performance. Active fund management is a tool that is in the hands of the investor in Ulips and you can exploit the free fundswitching option. While most insurers offer up to four free switches in a year, you should know the cost of switches beyond this, especially if you plan to actively manage your Ulip for portfolio rebalancing.

Finally, here is something most agents and analysts won’t tell you: the yield or internal rate of return (IRR) that the policy earns. This is a consolidated figure that takes into account the charge structure of the product, bringing every product benefit to the same base. Whenever you have inflows and outflows in a product (like Ulips), the correct way to compute returns involves using the IRR or one of its variants.

Puneet Nanda, CIO, ICICI Prudential Life Insurance “Ulips allow investors to enter the stock market in a disciplined way. They act just like SIPs.” Vishal Gupta, Associate director, (Mktg), Aviva India “Costs vary for Ulips offering both unit values and sum assured and those giving only the higher of the two.”

Considering one is aware of the fixed premium one is paying each year over the tenure of the policy at a fixed growth rate (for assumption), besides the various charges from the policy illustration, it is easy to work out the current value of future payments using the net present value (NPV) function. The IRR is then calculated to arrive at the yield. So, for a given 6% return if the yield is 3.1%, the insurer earns or deducts 2.9%.

Consider this: An investment of Rs 10 lakh grows to Rs 13.84 lakh in 10 years—a gain of about 40% in absolute terms. Now consider this: Rs 10 lakh is the result of years of putting Rs 50,000 in a Ulip. Assuming the Ulip grows at 6%, minus charges, the effective IRR works out to a mere 3.1%.

When you compare Ulip schemes, do so using the IRR. Also, the IRR will vary depending on the premium you commit for the same product because of the manner in which charges are structured. The IRR is a better way than NAVs to compare Ulips. The NAV might be more real-time, but observed in isolation, it has little or no meaning.

As you figure out the difference between various Ulips don’t forget that all these comparisons are based on assumptions. In reality, thanks to the vagaries of the market, the performance of the fund can vary a lot. That’s why it’s important to understand that you should stay invested for the long term if you plan to invest in a Ulip.

Buyers’ checklist Check the charges You need to understand clearly which charges are applicable for how many years, which charges go up, which ones come down and which stop after a certain duration. Illustration matters Irda rules say that insurance companies can use only 6% and 10% returns to illustrate the benefits of Ulips. Beware of fancy numbers assuming 25% and 30% returns. Death claim You need to know the amount given in case of a death claim. Does the Ulip give the sum assured and the accumulated unit value or only the higher of the two? Exit charges Ulips give you the freedom to exit, but find out when you can exit without having to pay for it, and how much you will have to pay when you can exit. Continuing cover Even if you don’t pay the premium, your cover will continue. However, in some policies, this is not automatic, so find out if you need to opt for it. Partial withdrawals Find out how much money you can withdraw without the policy being closed, how much you can withdraw in a year and how frequently it can be done. Taxation If the premium is less than 20% of the sum assured, the proceeds are tax-free at maturity; otherwise they are taxable.

 

When does a plan break even?
The best way to judge a Ulip, other than through its death benefit, is to compare the first year’s allocation charges and the break-even point. As the table below shows, the higher the first-year load, the longer a plan takes to break even.
Insurance company	Name of plan	First year load (%)	Break-even period*
Met Life	Met Smart Plus	6	1 yr
ICICI Prudential	Premier Life Gold	13	2 yrs
Birla Sun Life	Classic Life	14	2 yrs
SBI Life	Horizon	15	2 yrs 6 m
ICICI Prudential	Life Time Super	19	2 yrs 8 m
HDFC Standard Life	ULIP Endowment	27	3 yrs 2 m
Kotak Life	Kotak Flexi Plan	30	4 yrs
Tata AIG	Invest Assure	45	4 yrs 6 m
Birla Sun Life	Flexi Save Plus	65	5 yrs 2 m
Allianz Bajaj	Unit Gain Plus	24	5 yrs 6 m
*Assuming an annualised return of 10%                           Source: Kantilal Chhaganlal Securities
• Break-even periods depend on other factors besides the first-year load. • Fixed charges through the tenure of a policy impact more than a highlow tapering charge structure. • Select Ulip term depending on your insurance needs, investment horizon • For best performance and to make the most of market cycles, Ulip investment should span 10 years or more.