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Complete Guide to Unit Linked Insurance Plans | Best ULIP plans | What is ULIP? | How ULIP works? - YouTube
Channel: ET Money
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on the et money youtube channel we've
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covered quite
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a number of tax saving products such as
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nps
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epf ppf sukhanya samriddhi and of course
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elss or tax saving mutual funds however
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one of the products that never made it
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to the video lineup
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were the unit linked insurance plans or
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ulips
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so when one of our researchers first
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proposed to have a video on ulips
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the reaction from the rest of us was
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quite mooted and why not
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after all we have all heard for many
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years that ulips have an
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atrocious charge structure their
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insurance cover is too little
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the fund choices are poor the
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performance is bad etc etc
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anyways we allowed the research to go
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ahead and it's only when we started
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going deeper into the product
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did we realize that there was quite a
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difference between what we originally
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perceived
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and the reality surrounding the eulip hi
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everyone my name is shankar nath and in
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this video we shall look to weed out
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the many prejudices and misinformation
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associated with your lips
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by presenting the right information so
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that people like you
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and me can make the right decisions
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videos
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let's get started
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as the name suggests a ulip or unit
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linked insurance plan
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is a financial product that comprises of
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two parts
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one the investment portion that's where
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the phrase unit link comes from
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and two the insurance portion so while
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the unit presents
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itself as an investment come insurance
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product
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for all practical purposes one should
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treat it more
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as an investment product as it competes
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with mutual funds for the consumer's
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money
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it's often this insurance portion that
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mutual fund
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distributors point out to and say hey
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what's the use of
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insurance in an investment product so
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there's already some propaganda there
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but the point is certainly valid
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after all a the insurance portion is not
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free
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and b the insurance uses up some part of
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the premium which means
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less than 100 percent of the money
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you've paid as premium
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actually goes into your investment
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corpus but
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if you look closely at the ulips product
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construct
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one would find that it is actually the
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insurance part that gives the ulip
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all those wonderful tax benefits which
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are generally not available with the
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mutual fund industry
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so to put it together a ulip is a
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combination
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of investment insurance and tax saving
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that combines together to form a
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formidable triple benefit story
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that insurance agents can pitch to
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prospective policyholders
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now having said this ulips while they
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look good on paper
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do have some major and minor issues with
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their product construct
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to understand the ulips goods and bads
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one has to understand the three buckets
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in which the policyholders premium gets
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allocated and these are
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one insurance two the charges
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and thirdly the all important
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investments
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in fact the rest of this video will be
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all about detailing these three areas as
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we try to close in
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on the actual facts while keeping most
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of the misinformation
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and misconceptions away
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[Music]
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let's start with the part of the premium
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that goes towards life insurance
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earlier in the video we demonstrated
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that the insurance premium plays a dual
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role
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and need not be treated solely as an
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expense after all you do get some
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insurance
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not a sufficient cover but you do get
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something
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but more importantly the insurance
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provides tax benefits to the
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entire invested amount including the
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money that goes into your investment
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bucket
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if you're wondering how much insurance
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cover is offered in a ulip it's
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generally 10 times of the premium paid
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even though there's a provision of going
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lower to 7 times of the premium
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and if you're wondering why it's 10
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times then that's because the rules say
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that a sum assured of 10 times of the
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premium or more
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will be needed to be eligible for tax
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benefits
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our research also shows the general
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impression
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is that the insurance part of the
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premium is about 10
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the point is that it's very difficult to
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generalize this part to 10 percent
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and that's because insurance premiums
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depend on many factors like the age of
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the policyholders smoking habit
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the sum insured and a few more factors
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in fact we went
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ahead and took a quotation from an
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insurance company website for a 36 year
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old
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non-smoker male who is looking to invest
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one lakh of rupees every year in a ulip
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the benefit illustration we received
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gave us a life insurance coverage of 10
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lakhs that's
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10 times of the one lakh premium for
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which the allocated cost
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from the premium was 1200 rupees
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this 1200 rupees is what we refer to
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as the mortality charge in a ulip and in
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this case
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it turned out to be 1.2 percent of the
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premium paid
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and definitely not the 10 percent that
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we had heard elsewhere
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the second part of our research on
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mortality charges was a bit more
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fascinating
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when we observed that as a general
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principle the mortality charge kept on
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reducing every year
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and at one point it actually turns to
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zero in fact
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let's go back to the benefit
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illustration for a 36 year old
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here that as the fund value keeps
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increasing
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the mortality charge keeps on decreasing
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let's understand why
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now in the first year the insurer was
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expensing 1200 rupees against a life
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cover of 10 lakhs
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in other words the mortality rate for
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the 36 year old as per the insurer's
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actuary table
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was 0.12 then by the time we come to the
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second year the fund had already put
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your 1 lakh rupees to work
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and let's assume the fund value has
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increased and is now
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at 1 lakh 10 000 rupees which means the
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second year's mortality rate
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will not be applied on 10 lakhs but on
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10 lakhs minus 1.1 lakhs which comes to
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8.9 lakhs
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but also remember the mortality rate
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will not continue to be
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0.12 and that's because the policy
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holder is not 36 years anymore
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but is now 37 years old let's assume the
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mortality rate for
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a 37 year old is 0.13 percent
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which means in this case it's 0.13
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multiplied by 8.9 lakhs which comes to
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1157 rupees
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as you can see here the mortality charge
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has definitely come down in the second
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year
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so while your age pushes up the
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mortality rate
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the fund value which is growing at a
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much faster pace pushes
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down the mortality charge this is
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something about ulips that we didn't
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have
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any idea about so it was actually good
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to understand this interplay between
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the fund value and the mortality charges
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in fact we tried some
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seven to eight scenarios and while
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there's no specific period around this
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but if you're below 40 years of age then
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generally we see that your mortality
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charges will become
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zero by the eighth or the 9th year in
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most scenarios
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if you want to be 100 sure of this for
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your age simply take
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an online quote from any insurance
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company website
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and do explore the benefit illustration
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pdf for more details
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[Music]
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as a product ulips generally have a bad
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reputation with most people and the
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reason for that
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is their charge structure so what are
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these charges
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simply said a charge is any expense that
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is built by a ulip
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for example we discussed mortality
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charges in the previous section
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now that's one of the charges however
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mortality is an
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essential charge and goes into the very
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fabric of this product
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similarly units have fund management
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charges
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which are very similar to the expense
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ratio in mutual funds so this
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too is an essential charge outside of
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mortality
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and fund management charges everything
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else that is expensed by the insurance
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company
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comes under the umbrella of charges for
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the purpose of this video
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this includes things like a premium
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allocation charge which is a percentage
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of the premium that you pay
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then there is a policy administration
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charge which is
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a fixed expense charged on a monthly
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basis
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then there is a fund switching charge a
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partial withdrawal charge
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a discontinuous charge a surrender
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charge and maybe a couple more
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if you're wondering what these charges
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are for it's basically the life
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insurance company
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eating into the premium that you pay for
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increasing their own
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profits and for paying commission to
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insurance distributors like agents and
[546]
banks
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but having said this it would be wrong
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to label ulips
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as the big bad wolf of financial
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products
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in fact even the mutual fund industry
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until a few years back had expense
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structures
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which included entry loads the
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non-availability of direct plans higher
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cost of trading etc
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all of which were paid for from the
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investors money
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unfortunately in the case of eulips and
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especially in the period between 2004
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and 2010 most life insurance companies
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showed complete apathy and disregard to
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the policyholders interest
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to put apathy numbers most ulips of that
[585]
era
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were expensed at 30 40 even up to 50
[588]
percent of the first
[590]
year premium as charges so 2004 to 2010
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was
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one big party for the life insurance
[596]
industry
[597]
but what everyone forgot was the bigger
[600]
the party the greater is the hangover
[602]
and it's this hangover that euleps
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continue to suffer for
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over 10 years now in spite of having
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gone through a massive transformation
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especially when it comes to charges in
[613]
fact let's look at the charge structure
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of a couple of eulip plans that were
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created and sold prior to 2010.
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do notice the high premium allocation
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charges of
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up to 40 percent in the first year this
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meant
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60 percent or lower of your premium was
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being allocated
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towards your investment corpus in
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addition to these
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high premium allocation charges eulips
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of the pre-2010 era
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also had many smaller charges which all
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put together
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pumped up the ulip expenses which meant
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a low proportion of your paid premium
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was going towards investments
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now let's compare these eulips with the
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modern day ulips of the same insurance
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companies
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ah there we go okay so first and
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foremost the premium allocation charges
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are history
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on top of it also notice that a number
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of the smaller charges are also gone
[668]
in fact some life insurance companies
[670]
have gotten rid of
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all charges we had discussed in this
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section of the video
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and have retained only the two essential
[678]
charges
[678]
which are the mortality charge and the
[680]
fund management charge
[682]
net net the modern day eulips have a
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much lower charge structure than before
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but it's not something that is
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acknowledged or clarified openly by
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financial planners
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and mutual fund distributors and one can
[693]
understand why
[694]
similarly it is probable that insurance
[696]
agents will not divulge to a prospect
[699]
that all these charges we discussed
[701]
earlier plus the mortality and fund
[703]
management charges
[704]
attract a gst of 18 18 percent might
[708]
seem small but in our view
[710]
every decimal of a percentage counts as
[713]
this is money that's going away from
[714]
your pocket to someone else's
[716]
having said this it is our
[718]
recommendation that anyone who is
[720]
considering a ulip
[721]
should definitely examine their
[723]
personalized benefit illustration which
[725]
would be available
[727]
with your insurance agent or when you
[728]
take a quotation from a
[730]
insurance company website
[732]
[Music]
[735]
the final part of a ulip's construct and
[738]
most definitely the co
[739]
proposition is the investment part the
[741]
money that goes into your investment
[743]
bucket
[744]
is the net of all the charges that we
[746]
have discussed in the previous two
[748]
sections of this video
[749]
this money is then invested in funds
[751]
which are managed by the life insurance
[753]
companies
[754]
investment team in fact units operate a
[756]
lot like mutual funds
[758]
i mean the performance in ulips and
[760]
mutual funds is not guaranteed
[762]
just like mf's ulips also have a
[765]
professional fund management team
[767]
units are issued navs are declared on a
[769]
daily basis
[770]
a monthly fund statement is issued and
[773]
just like mutual fund companies
[775]
life insurance companies offer a number
[777]
of investment
[778]
options like large cap funds mid cap
[781]
funds blue chips
[782]
diversified equities debt money market
[785]
hybrid funds etc
[787]
so the true question that we need to ask
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and answer with regards to ulips is
[792]
how have the ulip funds been performing
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relative to the mutual funds
[796]
for this we put together the last 5-year
[799]
performance
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of ulips and mutual funds across a few
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popular categories where
[804]
investors generally park their money the
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data shows that the performance of the
[809]
average mutual fund
[810]
is a tad better than the average ulip
[813]
fund
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especially in the equity category
[816]
although not by much
[817]
which means the performance of ulips is
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quite comparable to that of mutual funds
[823]
the real issues with the investment
[825]
bucket are again related to the
[827]
construct of the ulips
[828]
the first issue is something we've
[830]
already discussed that is
[832]
the money that goes towards investment
[834]
is lower
[835]
than the premium paid as some part of
[838]
the premium is applied towards mortality
[840]
and other charges
[841]
a second concern is that ulips don't
[844]
have a porting feature
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wherein if you're not happy with one
[848]
insurance company's investment
[849]
performance
[850]
you cannot move your money to another
[852]
company
[853]
moreover with a high lock-in period of
[855]
five years
[856]
there's a chance that you might be stuck
[858]
with a poor or average performing fund
[861]
for a prolonged period of time which is
[863]
certainly something that we don't want
[866]
[Music]
[869]
in our opinion if you're ever
[871]
considering a ulip
[872]
always ask yourself this question where
[875]
does it fit
[876]
in my investment plan let me explain
[879]
this
[880]
the essence of investing is to start off
[882]
with a goal
[883]
and once you have a goal you decide
[885]
which product fits best to achieve that
[887]
goal
[888]
for example if retirement is your goal
[890]
you'll want to look at
[892]
epf nps your ppf contribution
[896]
in addition to the equity mutual funds
[898]
if paying for a car
[899]
is your goal then look no further than a
[902]
fixed deposit or debt mutual funds which
[904]
can best serve this goal
[906]
so with ulips it's the gold fitment part
[909]
that always seems to be a botheration
[912]
what
[912]
goal does ulip really serve and for whom
[916]
for example if someone is in their 60s
[919]
50s or even 40s
[920]
the ulip becomes a misfit because of the
[923]
high charges especially on account of
[925]
mortality
[926]
that's understandable but strangely the
[928]
same
[929]
problem shows up for people in the 20s
[931]
and 30s also
[933]
in this case it's not mortality but the
[935]
extra expenses
[937]
in terms of the premium allocation or
[939]
policy admin charges
[941]
the gst of 18 and the 1.35
[945]
fund management charges which all add up
[948]
to eat away a part of your investment
[950]
returns
[950]
in fact this point can be best
[952]
established with some simple back of the
[954]
envelope calculations
[956]
so ulips generally have a charge
[957]
structure which averages to 2.25 percent
[960]
over a 10-year period this is also
[962]
mandated by the insurance regulator
[964]
and then we have the direct mutual funds
[966]
whose expense ratio averages somewhere
[968]
close to one percent
[970]
that's a difference of 1.25 percent
[973]
if you simulate this additional 1.25
[975]
percent
[976]
over a eulip return of 12 over 10 years
[980]
you would see that mutual funds would
[982]
have delivered almost 12 percent
[984]
more wealth as compared to ulips just on
[987]
account of these charges
[989]
a 12 difference is certainly not a small
[992]
number
[992]
especially when one accounts for the
[994]
fact that a large
[996]
part of the eulip story is about saving
[998]
10 percent
[999]
on capital gain taxes which is currently
[1002]
being charged on mutual funds
[1004]
this means what we thought as a tax
[1007]
advantage
[1008]
might actually not be the case on an
[1010]
absolute basis
[1011]
and this is something that one should
[1012]
consider when evaluating ulips
[1014]
from an et money perspective we've
[1017]
always been great supporters of
[1019]
insurance plans
[1020]
and continue to assist tens of thousands
[1022]
of our investors with the ideal term
[1024]
insurance plan through our platform
[1027]
however a combination of product
[1029]
complexity
[1030]
undefined gold fitment compounding
[1033]
losses
[1034]
and a general lack of options in terms
[1036]
of asset classes and funds
[1038]
have dissuaded us from having ulip
[1040]
products on our platform
[1042]
additionally the recent budget amendment
[1044]
on charging capital gained taxes
[1046]
in cases where the annual premium
[1048]
exceeds 2.5 lakhs has mildly dampened
[1051]
our confidence on ulips
[1053]
and i say so and this is a bit
[1054]
speculative
[1056]
but this move in the budget is sort of
[1058]
giving a slight
[1059]
indication that ulips and mutual funds
[1062]
might be treated equally from a taxation
[1064]
standpoint eventually
[1066]
and with this we come to the end of this
[1068]
video
[1069]
i hope you liked our content and will
[1071]
draw many learnings from the information
[1073]
and insights presented don't forget to
[1076]
subscribe
[1076]
like comment and share this video with
[1078]
your friends and colleagues
[1080]
thank you for watching and i look
[1081]
forward to catching up with you next
[1083]
week
[1084]
with another insightful video until then
[1086]
mutual fund investments are subject to
[1088]
market risks
[1089]
read all scheme related documents
[1092]
carefully
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