With changes in charges and tax structure, Ulips have become a lot more attractive than mutual funds if you are willing to stay invested for long-term, says Vidyalaxmi

REACTING to the criticism against Ulips, the insurance regulator has brought about a number of changes in the way insurance companies structure these plans. At the same time, there have been changes in the tax structure on Ulips in the Union Budget. Both these measures have worked out in favour of the investor. If you are looking at a 20-year term, ULIPS charges work out to be more favourable than mutual funds.

Change in the charge structure: How does it impact you?

In July 2009, IRDA had mandated life insurers to impose a ceiling on their ULIPS charges (except mortality/morbidity charges, which is the cost of providing insurance protection). As per the notification, the difference between the gross return and net return (gross return minus the charges) for policies with tenure of up to 10 years should not exceed 300 basis points, while this gap is to be restricted to 225 basis points for those over 10 years. The fund management charge for policies across maturities was capped at 135 basis points. Following the directive, insurers filed for revised products and phased out the older products by December 2009. "The recent regulatory cap on charges has enhanced the attractiveness of Ulips for customers through higher IRRs and incentives such as guaranteed loyalty additions for staying invested over the long term," says Vishal Gupta, director of marketing, Aviva Life Insurance.

Change in the service tax: How does it impact you?

The finance minister has tweaked the service tax on Ulips, which could increase the net yield by up to 4%. The cost structure of Ulips include policy administration charges, premium allocation charges, mortality charges and fund management charges besides the surrender and fund-switching charges. As per last year's Budget, an investor was paying a service tax of 10% on all of these components. Now, this tax would be levied only on the fund management charges. This implies the other cost components would be freed from tax, which in turn would add to the internal rate of return (IRR). This change would effectively create a level-playing field for Ulips and mutual funds, which are treated as competitors among the financial products, say insurers. In mutual funds, the service tax is charged only on the asset management company's (AMC) fees. This change in the service benefit would be passed onto both the new as well as old customers as the revised service tax would be applicable on every premium amount paid once the finance bill is passed.

Are you investing in Ulips for the right reason?

If you have seen any of the ULIPS advertisements, it refers to child's education or retirement planning. The clear underlying message here is the tenure of the investment. Even insurers define Ulips as a longterm insurance-cum saving instrument and hence, the minimum recommended policy term is 10 years. Even if the policy has an option for partial withdrawals or surrender, you have to look at least 10 years to make some decent gains. "Under the new charge structure, the insurer earns the bulk of charges within five years as there is no year on year cap in charges. Even if the policy permits early exit, you will see significant erosion in capital," says Suresh Sadagopan, a certified financial planner.

What should be your risk appetite?

Ulips have something to give to all investor categories because of high flexibility in altering asset allocation. "Every Ulip has an all debt to a healthy debt-to-equity ratio to an all equity component. So every investor can identify with a Ulips. But if an investor is looking at a 10-year horizon, I recommend pure equity-oriented ULIPS," says Pranav Mishra, senior vice-president & head - Products, ICICI Prudential Life Insurance.

Are Ulips the best investment option?

If you are investing for less than 10-years, go for mutual funds. For longer-term investments, Ulips are a better option following the reduction in the charge structure. Agents, however, mis-sell Ulips by positioning them as a short-term premium payment instrument. "It also becomes easier to tap a customer as you are not forcing him to get into a long-term contract. The concept of a lock-in and annual/quarterly frequency in premium payments is not very popular with customers. Hence, most agents find it easier to sell Ulips than a simple term plan," says Gaurang Shah, managing director of Kotak Life Insurance.

GAINS UNIT-BY-UNIT

* ULIP has a high front loading. Hence, stay invested for at least 10 years to earn good gains

* Don't stop paying premiums after five years and buy another ULIP. This will benefit your agent more than you

* The narrowing of service tax will increase returns by at least 3.5-4%

* The returns are mere projections not guaranteed unless written in the policy document. Often you will get the guaranteed return only if you lock in for longer tenure

* There are various strategies and debt-to-ratio proportions in ULIPs. You can go for high equity quotient if you plan to stay invested at least for 10 years If an investor surrenders the policy, the formula of difference between gross yield to net yield will not apply

Choose your fund: depending upon your age and risk profile

Use switches effectively: You may have opted for a mix of 75% equity and 25% debt on your ULIP. But when you inch closer towards maturity, minimise your exposure to equity as low as 20%

Start early: If you start at the age of 30-35, you can create a 20-year long-term investment by systematically investing year on year

Invest regularly: despite temporary fluctuations.

Source: The Economic Times