In some NULIPs you can increase or decrease the policy term, increase or decrease the premium payment term, choose to discontinue premium payment after 5 years and retain or reduce the original sum assured level.
Perceptions are slow to change, even if the underlying realities change dramatically. Let us consider the example of term insurance products. The perception ‘no returns equals to no benefit’ is slowly but surely changing. While there were few takers for this category earlier, the awareness level has gone up considerably over the last few years. This has been possible due to continuous efforts by life insurers, the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) scheme and also the development of the digital platforms. The uptake of pure term insurance is increasing because people have started to appreciate its value as an instrument for financial security and protection and not seek returns commensurate to those on savings or investment contracts.
Currently Unit Linked Insurance Products (ULIPs) are experiencing a similar fate where the awareness levels are not as high as they should be. Despite the changes that this product category has undergone, there seem to be very few people who are talking about the benefits in the correct context. A quick glance through various product reviews and product comparisons might influence you towards a notion that ULIPs are NOT meant for you.
However, the truth is quite different. Post regulatory changes over the last few years, a new generation of ULIPs have emerged. Let’s call them NULIPs – for New age ULIPs – which offer a compelling proposition.
NULIPs: Charges that are lower than ever
Typical charges in ULIPs are premium allocation charge (as a percentage of premium at the time of premium payment), policy administration charges (deducted monthly as a percentage of premium or a fixed Rs. value), fund management charges (percentage of fund value adjusted in daily NAV) and mortality charge (to provide life cover based on amount at risk and age).
ULIPs did have high charges in the first decade, since their introduction. However, these charges have reduced dramatically over the years. This has been primarily driven by the product regulations that came about in 2010 and 2013, and also to an extent by a competitive market place and the emergence of digital channels. In NULIPs, the effective charges (excluding cost of risk covers, e.g. mortality, morbidity, etc. and applicable taxes) over a 10 year and 15 year policy term cannot lead to a drag of more than 3% and 2.25%, respectively in your annualised returns at 8% p.a.
For the longest time it was perceived that ULIPs have high allocation charges, which are detrimental to the net returns. Thanks to the innovations by life insurers, NULIPs do not fight the perception by simply reducing allocation charges, instead they take the game to a different plane. The total premium allocation charge of most ULIPs for the first 5 policy years reduced from about 57% in 2006 to a range of between 15% – 20% in 2013 and currently in 2018, for policies purchased online, the premium allocation charge is zero. That is correct! There are NO premium allocation charges in some NULIPs.
The fund management charges (FMCs) for NULIPs are capped at 1.35% of the fund value, annually, which is much lower than the expense ratio cap of 2.50% on equity Mutual Funds (MFs).
Thanks to improving health care facilities and vast data available with insurers, the mortality charges have been reducing as well. Mortality charge constitutes a very small portion of the overall charges in NULIPs. At higher ages, savings-focused investors often purchase the policy with a younger family member as the life assured to reduce the mortality charges further. Also, some NULIPS refund mortality charges at maturity.
With such low charges, NULIPs are arguably one of the most cost-effective investment instruments available in the market today that provide access to a wide range of asset classes along with the additional benefit of life cover at very reasonable costs.
Greater flexibility and ease of access
Some features that make ULIPs flexible are:• Switch: Option to move money seamlessly from one fund to another
• Premium redirection: Option to choose allocation of funds for renewal premiums
• Partial withdrawal: Option to redeem part of the funds, useful for exigencies
• Settlement Option: Option to receive maturity benefit over a period of up to 5 years in installments
These features are perhaps as old as the category itself, and in the earlier avatars they often came with conditions that dissuaded their actual usage. For instance, many ULIPs offered a maximum of four free switches in a year, post which there would be a switching charge. Partial withdrawals were limited to 15% or 20% of the fund value. Moreover, access to such features was difficult. You could be an active investor looking to move from equity funds to a money market fund when you expect markets to decline. In a practical scenario, you had to walk into a life insurance company branch, or call the call centre and follow a lengthy and tedious process for the ‘switch request’.
However, the NULIPs and the insurers offering them have upped the game significantly in terms of flexibility. The charges for the flexibility related features have also been reduced to zero in many NULIPs. Moreover, the limits on the number of transactions or the value of transactions have been eased. Most NULIPs offer unlimited free switches between funds, there are some NULIPs which allow up to 95% of the fund value to be accessed through partial withdrawals.
In some NULIPs you can increase or decrease the policy term, increase or decrease the premium payment term, choose to discontinue premium payment after 5 years and retain or reduce the original sum assured level. This is over and above the standard flexibility related features listed above.
Thanks to the digital platform, access to these flexibilities is much easier. Right from submitting partial withdrawal requests, to making fund allocations, switching funds, to tracking fund performance – everything can be done online.
Tax benefits – No LTCG
NULIPs with a sum assured which is at least 10 times the annualised premium are eligible for tax exemptions under Section 10(10D) of the Income Tax Act. Thus, long term capital gains (LTCG) tax is not applicable. In addition, customers can move their money between equity, debt and cash oriented funds at any point without incurring any potential tax liability. This is a definite edge over competing savings and investment instruments such as mutual funds which incur LTCG tax with effect from 1st April 2018.
With their low charge structures and flexibilities and features offered which promote long term investment behavior, e.g. loyalty addition, return of mortality charge at maturity, etc. and the recent LTCG tax announcement; NULIPs have become an attractive and compelling proposition for any long-term investor.
How do NULIPs compare against MFs
Most of the discussion so far has been on NULIPs in contrast to older ULIPs. However, after having spoken about the LTCG impact on MFs, let us compare the expected returns in NULIPs with that of equity MFs to see how each category fares.
We have considered a NULIP (purchased online) which does not have premium allocation or policy admin charges with an annual premium of Rs. 1 lakh per annum and returns @ 8%.
The difference in the fund values offer testimony to the edge that NULIPs have over competing products. Another crucial aspect which would need to be considered while comparing would be that of the life cover offered by a NULIP, which the MF does not provide. This life cover benefit is over and above the higher expected returns that NULIPs provide.
Even if we ignore the benefit of life cover, the fund value offered by NULIPs at the end of the term would be higher than that offered by MF.
ConclusionA customer seeking to get the best value out of their money would want an instrument which offers four key benefits:
• Access to varied asset classes
• Low effective charges
• Flexibility and ease in terms of investment options/funds/withdrawals
• Tax benefits
By offering all of the above and more, NULIPs are best placed today to be the preferred investment avenue for retail investors with long term investment horizons. Those with an investment horizon below five years might still stay away from NULIPs since there is a lock-in period of five years.
However, it is high time that long-term focused and systematic investors take a look at the new avatar of the product which seamlessly offers both protection and savings benefits under one umbrella.The writer is Sr. Vice President – Actuarial at HDFC Life