They are the least understood yet most invested product in this country- ULIPs or Unit Linked Insurance Policies.
And we will cull out the winners from the very long list of ULIPs available to you.
And believe me finding the best ones is like unravelling a noodle soup. It takes a long time and is tough to do simply because the product is still so complicated; but we've done it just to help you take the right decision.
We have always maintained that ULIPs are a complicated product and we don’t like them in their current form but we also recognise the good things about ULIPs, the flexibility they offer to rebalance your portfolio, the ease of investment they offer by combining long term savings with financial protection and chances are you already are invested in some ULIP or another. So today we've decided to help you make the most of your ULIP investments - what is a good ULIP and are you invested in a good ULIP?
So, what is the simplest way to start narrowing down on a good ULIP?
A really a good ULIP is one that simply costs less. Costs are very critical in a ULIP because they can eat up a lot of the returns- a difference of just 0.5 per cent in cost, over 20 years can cost you about 7 lakh rupees.
When we set out to do the ULIP rankings we ran up against the problem of not having a product that is open to analysis or comparison. So, we've had to split this up into first looking at what the product costs and then looking at what the product returns.
Because there are so many costs and all at different rates and applied differently, it is impossible to know what a ULIP really costs. We've used the IRR method to look at post cost return. What you need to know is that if the ULIP returns 10 per cent a year, what you really get is say 6 or 7 or 8 per cent. The rest goes as costs, per year. And we said that the difference of just 0.5 per cent means big bucks over the long term.
Then returns: we need to see the track record of the fund manager who is managing your money to see how well the ULIP has done. We look at 2 funds - balanced and aggressive and see the returns to find out how they have done against the benchmark. A benchmark is the base return you MUST get. Ideally you must get benchmark plus 5 to 7 per cent.
The ULIP is still a hugely complicated product.
Now, coming to the big bite in ULIPs or the costs of ULIP which can shave off hefty returns at the end of your tenure, here's the ranking of ULIPs based on what they charge you.
Type I ULIP
On death you get: Higher of sum assured OR fund value
On purely cost basis, amongst the lowest cost ULIPs:
# Birla Sun Life' Classic Life Premier tops the chart; after the costs of the ULIP you end up with a little over 8 per cent return.
# Aviva Life's Freedom Life Plan ranks number two with 7.82 per cent
# The new kid on the block or AEGON Religare Life's Protect Gain- returns around 7.76 per cent
# Kotak Mahindra Life's Long Life Wealth Plus- 7.69 per cent
# ING Vysya Life's High Life is a close fifth at 7.62 per cent
Now these are the Type 1 ULIPs or the ULIPs which offer higher of the sum assured or the fund value at redemption. Then there are policies which give you both- that is sum assured and fund value.
This one is confusing- why would I ever go with a ULIP which gives me one or the other and not go for a ULIP which gives me both? Because the insurance industry thrives on the investor not knowing the difference. They push what is good for the agent rather than what is good for you and me. All insurance companies don’t even offer Type II policies. In our study we had 32 Type I and just 10 Type II.
Type II ULIP
On death you get : Sum assured PLUS fund value
A quick look at the ULIPs in Type II, where on death you get both sum assured and fund value and what 10 per cent return really means.
You must ask your agent to bring you ULIP products which offer both.
# Kotak Mahindra Life's Platinum Advantage Plan is the least cost policy here returning 7.55 per cent post charges
# Birla Sun Life's SupremeLife is second best at 7.50 per cent
# ING Vysya Life's High Life Plus a tad lower at 7.37 per cent
# Two ICICI policies - ICICI Prudential 's LifeStage RP at 7.18 per cent and Life Stage Assure at 6.98 per cent, rank 4th and 5th.
Now we have the lowest cost polices. We look at which of these give better returns. We know that a ULIP will give you fund options just like a mutual fund. So we've taken two fund options here - a balanced fund that has up to 40 per cent equity and the other that have more than 60 per cent equity. The benchmarks are really important since they indicate the minimum returns that you should expect.
Let’s take a quick look at the safe policy options where majority or 60 per cent is invested in debt or safe products and a lesser amount or 40 per cent is in equity. You know what we find here - only one policy has given returns higher than the benchmark index and that's Max New York's Life Balanced which has returned 7.97 per cent in the last two years. All others are currently underperforming the benchmark:
Benchmark - Crisil Debt Hybrid (60:40): 6.97 per cent
# ICICI Prudential's Life Balancer at 6.63 per cent
# HDFC Standard Defensive Managed Fund at 5.80 per cent
# Metlife's Moderator is at 5.00 per cent
# Birla Sun Life's Individual Enhancer has returned less than 5 per cent
That's pretty dismal compared to the benchmark at 6.97 per cent and these are the best performing scheme in Type II ULIPs. So the rest must be even lower.
Now, do we need to give them longer time to outperform the benchmark because right now they don’t inspire much confidence?
Actually the 60 per cent plus equity have not done badly at all. We have five schemes that have given benchmark plus returns. Not bad at all.
ULIPs which are aggressive on equity have really outperformed the falling market because the debt side of these policies has helped curtail the losses. The winners in the category of more than 60 per cent in equity includes, Bajaj Allianz Life's Pure Stock Fund with over 7.00 per cent returns, Kotak Aggressive Growth Fund and ICICI Prudential Life's Maximiser II both at about 5.8 per cent.
Bajaj Allianz Unit Gain Plus - Equity Index at 5.19 per cent and ICICI Prudential Life's maximiser at 4.98 per ecnt.
Benchmark - BSE 200 returned 1.99 per cent in this period.
Now, there are too many schemes and still too complicated for me to take a decision as an average investor. This is too much information to grapple with, right?
Yes, and we've only been able to handle some of the plans that are out there. If you have a plan that does not figure here, you need to ask your company or agent to tell you what the IRR of the policy is for a 10 per cent return. They HAVE to tell you that. Anything over 7.5 per cent is good. Next look at what fund option you have. Ask the agent for the benchmark and a 2 or 3 year return and see if you are getting a return that is better than the benchmark. Tough to do, I know, but this is long term investing - we need to spend some time on this.
TO end with we ranked India's most favourite investment and insurance product – ULIP. The list was long because there is no easy way to rank ULIPs. It’s conditional- to the type of scheme you go for. The information we culled out, though could point you to the right direction in your ULIP choices.