ARE UNIT LINKED INSURANCE PLANS BETTER INVESTMENT?

ARE UNIT LINKED INSURANCE PLANS
BETTER INVESTMENT?
Sudindra
V R and Ranjith Rajan
A
ULIP or Unite Linked Insurance Plan is a market linked Insurance product which
combines Investment and Insurance. ULIP is a plan which linked to invest in
various investment alternatives as well as flexibility in investing in equity
or debt fund as per investor risk level. ULIP is a combination of Insurance and
Investment option considered as most popular among investors.  Premium amount is divided into multiple
categories, which includes Premium allocation charges, surrender charges,
Mortality charges, fund management charges, fund switching charges,
discontinuation charges and the remaining sum of money invested across various
investment option.  It is beneficial for
all categories of investors, as a good investment options due to transparent
structure, features and charges, flexibility to switch between funds, insurance
coverage options, flexibility to choose premium payment frequency, additional
risk coverage by adding riders, various fund option suitable according to risk
taking ability and tax benefit u/s 80C, 80D and 10 (10D). Although Mutual funds
and traditional plans are available in market ULIP is most comprehensive and
suitable to all categories of investors.

Are ULIP’s Competitive products?

ULIP
plans are used for the purpose of wealth accumulation recommended by many
financial planners. It gives flexibility to fund their future financial goals
for retirement, wealth creation, children’s educations, health benefits and
other financial goals of investors.

Pros and Cons of ULIP

ULIP’s
are transparent wherein you can control where your money invested, gives
flexibility of multiple fund options, get additional benefits like critical
illness and additional disabilities, disciplined investment if investors
staying for long term. Although ULIP’s are better investment, it includes some
of the limitations: lock in period of 5 years, having fixed policy terms, higher
the age protection benefits become expensive and insurance agents may misguide
the investors.

For better clarity the following study done

Assume
that the Investor aged 30 years investing INR. 50,000 as a premium on annual basis
with sum assured amount of INR 5,00,000 investor is having an option to choose
various ULIP product of Insurance companies.

Table 1: Table showing various ULIP products, Maturity
value and past performance.

Plan
Invested
amount
MV
@ 8%
Past
performance
1
year return
2
years returns
5
years returns
HDFC Click 2 Invest
250000
299000
9.69
10.46
9.03
SBI Life Insurance Wealth Insurance
250000
298000
10.05
11.18
9.81
Bajaj Allianz Future gain
250000
294000
10.01
11.27
9.74
Aegon Life Invest
250000
294000
9.06
10.51
8.43
Birla sun life insurance Fortune Elite
250000
284000
8.98
10.53
9.22
PNB MetLife Mera Wealth plan
250000
283000
9.48
10.47
8.83
ICICI prudential Wealth Builder II
250000
272000
10.58
10.86
9.71
Sources: Policybazaar.com

Table2: Table showing the other investment alternatives
and maturity values

Various schemes
Effective Annual Interest rate
Investment amount
MV after 5 years
Savings account (Bank/post office)
4%
250000
270816
Post office Term deposits 5 years
8.03%
250000
293505
PPF
8%
250000
293330
KVP
7.7%
250000
291580
Bank fixed deposits
7.5%
250000
290419
Post office recurring deposits
7.5%
250000
                   290419
Sources: authors calculations.
* Assuming the Rs. 50,000 amount is
invested for 5 years.

Interpretations:

From
the above calculation ULIP’s are better investment alternatives as it provides
twin benefits of great return with risk coverage. The maturity values HDFC,
SBI, Bajaj Allianz and Aegon ULIP products are higher than with other
investment alternatives. Maturity values have taken based on 8% returns, but
the historical returns on various ULIP schemes with minimum of 8.43% and
average of 9.9% which is higher than any other investment alternatives. Apart
from the returns, the tax implication on other investment may further reduce
the returns on other investment alternatives. Mutual funds are also providing
greater flexibility with good returns, but the risk coverage will not be
available in Mutual fund. Hence the ULIP’s can be considered as one of the
investment options for investors. ULIPs gives profitable for individuals who
are not willing to invest in equity related investments like Mutual funds,
direct investment in stock market. Although ULIP’s may not give immediate
liquidity as lock in period exists, this will give greater profitability in
long run.
<policybazaar.com>
<https://www.relakhs.com/small-saving-schemes-interest-rates-2016-2017-fy/>
Mr. Ranjith
Rajan K is working for Altisource Pvt. Ltd. as Specialist-Due diligence from
last 10 years and also a member of FPSB India, professional financial planners body.
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