Analysis of ULIP’s which Gurantee Highest NAV in 7 Years – the Real Dark Hidden Facts and Frauds Behind Such Offerings

The catch and the real story behing ULIP or Life Insurance Investment schemes which gurantee HIGHEST NAV in 5,6,7 Years is explained below. Though these schemes look attractive with tag-lines like ‘Highest NAV Guaranteed’ there is a nice story behind it. Read it ON to get the complete picture.

What the investor thinks?

It gives the impression that one will participate in the equity market growth. That of course is not the case. What a company guarantees is the highest value of it’s own NAV. For guaranteeing the NAV they will have to invest in debt products whose maturity value is equal to the guaranteed value.

How these kind of products work ?

These products use Constant Proportion Portfolio Insurance concept. Here, the portfolio is managed and allocated dynamically between debt and equity in a way that the highest NAV attained is locked by moving a portion of equity assets to debt, whose maturity value will be equal to highest NAV attained till then. Over a period of time, equity assets are bound to move to debt. The reverse however may not be possible as when equity markets fall, it may not be possible to move debt funds to equity as they may be locked in to assure highest NAV.

So, what is good about the product?

• Firstly, it offers capital guarantee from day 1. You are assured that you will get your principal back.
• Secondly, you are assured of whatever growth happens in it’s portfolio, in terms of NAV. For risk averse investors, it is a major source of comfort as they know that the principal is safe and any growth in NAV is locked in (something like the concept of reversionary bonus in traditional policies).
• Thirdly, one is taking advantage of equity exposure in the beginning and overtime it is shifting to debt – which is inline with lifestage requirements, to an extent. But here the change will be much faster to debt.
• Fourthly, it can be treated as a debt oriented product which will give some returns with an equity kicker in the earlier years. It is like a hybrid product like MIP, with the difference that the equity portion comes down over time.

What are the downsides?

• In one word – Charges! Let us take the case of LIC Wealth Plus. For a regular premium payment between Rs 20,000 to Rs.2 Lakhs, the Premium Allocation charges is 12.5%, in the first year and 2.5%pa thereafter. Policy Administration Charges is Rs.60/-pm in the first year, Rs 25 pm from the second year onwards, escalating at 3% pa. Fund Management Charge is 1%pa and 0.35% pa is the Guarantee charge. The charges in most products will be on similar lines. This does not look that cheap for a fund that will eventually be a debt fund in the later years.
• There is nothing stopping the fund manager from having a substantial debt component even in the earlier years, as the mandate in such products is that they can hold 0- 100% in Debt or equities.
• Those thinking that they will participate in the upsides of the Equity market will be disappointed as this category of product assures highest NAV of the fund itself.
• This then turns out to be a product that has a fairly long maturity – at least 3 years or more. For a return that is expected to be somewhat higher than a debt product, locking in for long periods makes no sense.
• Guarantee of highest NAV is applicable only at maturity, not otherwise. This clause immediately makes the product less attractive as it is a long duration product. Any withdrawals in between for any exigencies, beats the whole purpose of investing in such a product.

You have heard it all. You need to decide if it makes sense to invest in such a product.

I woke up early today, actually couldnt sleep all night. So guys I am adding some trading tips of today. These are various tips pulled from some research work and some recommendations from brokers. So play with calculated risks. Also watch out for 4529. Its an important support level. If its breatched then market will see some correction in short term.

Ashwani Gujral [Jul 29, 2009]

Buy ICSA with stop loss of Rs 172 for targets of Rs 215
Buy Rolta with stop loss of Rs 130 for targets of Rs 160-Rs 175

VK Sharma
Technical Analyst

Reliance Infra 1209.95 3.91%
Buy Reliance Infrastructure around Rs 1209.95. Stop loss of Rs 1185.75

Hitendra Vasudeo

Bank of India 318.80 -4.21%
Sell Bank of India around Rs 324.70-Rs 332.90. Stop Loss of Rs 339, cover short at Rs 310.60-Rs

DLF 426.10 3.40%
Buy DLF around Rs 424.90-Rs 416.20. Stop Loss of Rs 412, book profit at Rs 434-Rs 453

Unit Linked Insurance Plan (ULIP) Advantages and Disadvantages Explained

KNOCK KNOCK!

Me: Who is it?

“I am an Unit Linked Insurance Plan (ULIP)”

And thus began my conversation with a ULIP who came to my doorstep one day. I took the opportunity to ask him a few of my doubts. Here are excerpts from my conversation:

Me: Go away! I am told you are too expensive? I should not be investing into ULIPs ! I have learnt that term insurance + mutual funds is a better idea.ULIP (U): That may be right? But over a longer term I am better.

Me: How is that possible? I have to pay so much upfront i.e. in terms of my initial deductions. My breakeven will be a couple of years.

ULIP (U): Yes that’s right! You have to think of me as a helping hand for a period of about 20 years or so. The shorter the time frame you keep in mind the more expensive I can be.

Me: But the whole world tells me that I should just pay three premiums and that’s it.

ULIP (U): That may be technically correct but that is the way marketing agents are, who don’t tell you the real truth.

Me: So what is the real truth?

ULIP (U): It works like this. The premium you pay is broadly broken down into three parts viz., the expenses, mortality premium and the investment amount. The expenses are those of the life insurance company and a major portion of that is the commission paid to the agent. Hence, in the initial years you pay a huge amount. The mortality premium is the amount of money you will be paying for enjoying the life insurance cover. What remains is then invested as per your choice.

This means the larger the cover you take the more an amount will be allotted to the mortality premium thereby leaving less for investment.

Me: I see. So you are also telling me that I should opt for a lesser cover.

ULIP (U): Not only that. First assess your life insurance need. Then look at your age. The reason for this being the larger the life insurance you take and the older you are I will charge more mortality premium each year. The premium rate is different and higher each year unlike a term policy that remains steady all the way. You don’t realise this as you are not told of this fact and besides you are paying the same premium and you don’t really understand the break-up of this premium which is done internally. Hence, if you have an older age, large cover it will take you much longer to break even on your investment via premiums. This could be many years, even as much as 7-8 years. Further, if you just pay for 3 years and then if the markets keep crashing or going downwards I will deduct huge amounts as mortality premium. There are chances that all your premiums can get wiped off and you have nothing and the policy will also lapse for want of premium payment. Do not take a ULIP if you don’t plan to pay the premium for 20 years. Don’t get thrilled by the returns as those are just returns on net asset value (NAV)—your actual returns will depend on your age, life insurance cover and premium and they can be much much lesser. Agents are interested in their commission more than they are interested in giving you all the information. If you lose money they will say markets were bad and their advice would be for you to start another policy. Thus they will get more commission rather they should suggest to you to continue your policy and/or consider reducing the life insurance cover. Then take a term life cover to compensate for the reduction of cover from ULIP.

Me: Tell me more?

ULIP (U): If you are of age 40 or more generally avoid ULIP or reduce the life insurance cover substantially, and treat it like a pure investment product. But the breakeven will still be some years. Over a 20 years period I am better then a mutual fund investment. But then 20 years is too long a period. If you start doing direct investments and mutual funds reduce their management charge or make it flexible I will lose hands down. ULIP is a convenient product for someone who just wants to take no effort on investment management, just one product and both life insurance and investment is done with the choice of risk profile. You can also change your profile by making free switches but the cost comes to you in the form of higher mortality premium and initial expenses each time you make a payment.

Me: So I understand that I should not go by purely hearing what marketers have to say. I should be prudent. I understand that a high cover can be dangerous if I take an aggressive profile and during bad phases of the markets I can lose quite a bit.

ULIP (U): That’s a good summary and quite right too. Also don’t pay huge premiums—it only benefits agents as they get a larger commission at the cost of increasing your breakeven years. Go for the minimum required. This also reduces pressure to keep paying that each year. Take a term policy as well. Use the top option as the cost is normally much lesser and you get tax benefits on that too.

(Note to myself: Another good tip!)

Final word: If you are moving above 40-45 in age and you have a cover to fund ratio in excess of 3 that can be dangerous.  To explain this: If your life insurance cover is say Rs 15 lakh and your accumulated fund value is say Rs 5 lakh then the ratio of 15 divide by 5 is 3.

Me: ULIP seems to be ‘just ok’. No big deal. I should also explore other options.

TOP UPS

ULIPs are often sold as investments for the long run. While that is true, what is also true is that ULIPs are expensive, what with allocations charges ranging from 15-40 per cent in the first year. So here’s a little trick to make ULIPs work in the long term, while beating costs at the same time. Top-ups!

What is a top-up premium?
A top up premium is something that a policy holder can invest in his ULIP on top of his existing premium payment. For example, if your existing annual premium is Rs 7,000 and you choose to invest an extra Rs 7,000 over and above this premium, then it becomes a top up premium.

Will it benefit the policy holder?
The premium allocation charge (PAC) on a regular ULIP premium can be around 25 per cent in the first year, dropping down to less around 5 per cent in the third year. On the other hand the premium allocation charge for a top up premium is only around 1 per cent, irrespective of the year when you top up.

Number crunching
Let us compare two scenarios.

Scenario ONE: You pay an annual premium of Rs 20,000 for a 15 year term.

Assumptions: Charges and returns

First year allocation charge: 20 per cent

Second year allocation charge: 15 per cent

Third year allocation charge: 5 per cent

Fourth year onwards: 3 per cent

Administration charges: Rs 30 per month

Fund management charge: 1.5 per cent per annum

Rate of return: 10 per cent per annum

Outcome: At the end of 15 years, you would have a fund balance of Rs 5.6 lakh.

Scenario TWO: You pay an annual premium of Rs 10,000 and top up with Rs 10,000 every year for a 15 year term.

Assumptions: Charges and returns

Top up allocation charge: 1 per cent

Fund management charge on top up: 1.5 per cent per annum

Rate of return: 10 per cent per annum

Outcome: At the end of 15 years, you would have a fund balance of Rs 5.8 lakh.

Clearly, topping up is a beneficial option. While the benefit in this case is only Rs 20,000, the benefits are much higher for policies with larger premiums.

What are the points to remember?

a. You will be eligible to pay a top up premium only if you have been regular with your existing premiums. Defaults will prevent you from using the top up premium option.

b. The top-up premium comes with a minimum limit, which means you can only invest over and above a certain amount as a top up premium. If you exceed that limit, then your sum assured will also increase in proportion to the top up amount. This is in accordance with a directive from the Insurance Regulatory and Development Authority (IRDA) for insurance companies.

c. Even in the case of top up premium, do remember partial withdrawals are not possible until a time frame of 3 years post investing.

d. These top ups need not be invested at regular intervals. You can invest this top ups in a debt option even while your regular premiums are invested in an equity option and the reverse holds true as well.

e. The ongoing fund management cost will continue on top-ups as well.

f. Go through the fine print as is the case with every money related transaction. Do not be reckless with the limit on your top ups. If your total premium, including top up, for any year exceeds 20 per cent of the sum assured, you will lost the deduction benefit under section 80C.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.ULIPs De-Mystefied

S&P Hits 2 Months Low.

If BSE and NSE in India saw Maniac Monday, Torrid Tuesday welcomed US investors. Dow and Nasdaq ended the  day with loss of 161.27 and 41 odd points respectively. S&P 500 ended, at 10 week lows of 881.03. No one sees the green shoots at-least as yet in US market. What it means for Indian Markets tomorrow. The weakening dollar will hit the software companies. Metals, commodities and Oil stocks will be hit, how badly, can’t tell. But till government starts producing road-maps to support the markets, this direction-less budget is sure to add volatility to the markets. Tuesday markets somehow survived as Pranab Mukherjee was on T.V. throughout the trading hours trying to smile his way through the Dravidian budget he has presented before us. But what happens on Wednesday is anybody’s guess.

What would work is, a slew of blue coats [read royal cabinet ministers] to come on TV channels and shell out the crisp road-maps and guidelines of next 100 day agenda. The resilience of Indian investors is still there. Government has to just step forward and in no uncertain words convey that we won’t pull the rug from under your floor. Sounds Easy! Trust the government to sleep in bed with hedge fund managers and do exactly opposite.

If I wake up early in the morning will put forth a more convincing trading policy for the day. Just keep your eye on how Chinese [Shanghai] markets react.

Ratings agency Moody’s Investors Service has maintained a Baa3 foreign currency rating and Ba2 local currency sovereign rating, which is non-investment grade, on India.

“This is clearly a growth-oriented budget and contains a slightly larger than expected headline deficit number, but it is broadly consistent with near-term stability in the government’s debt trajectory,” Aninda Mitra, a senior analyst at Moody’s, said.

This is largely based on the estimated fiscal deficit, which is expected to balloon to 6.8 percent of GDP, its highest in 16 years.

For latecomers, Indian Union budget was tabled on July 6, 2009 on the floor of Indian Parliament by the finance minister Pranab Mukherjee.

When Pranab, who is one of the most seasoned politician in Indian Political arena, was handed over the reins of sensitive Finance portfolio everyone was full of optimism. The government made all the right noises and everyone expected this budget to be the BIG B, an occasion which could catapult India to new horizons. A place from where the Chinese Dragon would pale in comparison. But unfortunately the event turned to be a non-event. With passing hints of reforms here and there, all that the budget offered was governments inclinations towards Social Reforms favoring its presumed electorate.

The government says budget is just summary of government’s earnings and expenses and it is not conjugated with daily ups and downs of the BSE Sensex; Rightly said, period… but is it fine to give market forces forces a royal ignore? Its easier said than done. Government needs funds for its ambitious social reforms and it seems to have none. Its 6.8 % down in the girth of borrowing and sinking deeper with each passing day. Everyone knows the money comes from Markets and Markets reflect the FII sentiments. If you plan to sell sick PSU, who buys them … the hungry farmers? No, sir; you come to markets. Why ignore such strong forces and then spend 2 weeks mending broken fences. Markets don’t need government to do much. They don’t want Pranab to run aircraft companies, make breads, produce T.V. shows etc. People want government to govern and regulate. And you can always trust the government to do just opposite.

Again, I have maintained a 5/10 rating the budget. At-least, government didn’t do anything something stupid by trying to do too much and ending up shooting itself in foot. Pranab just didn’t do anything. He made budget a non-event which should be. But then why hide such a useless piece of paper with great zeal. If its just an expense sheet release it like economic survey document.  Pranab should have come to TV channels and dropped in what is going to be and not going to be on the budget.

People had such great expectations out of budget and by the look of how market has reacted, one would say curiosity killed the cat.