Low-cost unit-linked insurance plans (Ulips) entered the market recently and have been proving to be a tough competition for mutual funds. The new Ulip avatar gets rid of the earlier redundancies.
What has changed?
In the earlier version, the expense ratio for Ulips was 3-5%, with charges as high 60% on the first year’s premium. The lock-in was three years and fees and commission were not evenly distributed over time — the product was very front-loaded and even surrender charges were heavy. But, in the new version, the overall administrative and fund management charges are 1-2.25%, and the lock-in is five years. Surrender charges are low — if discontinued in the first year, it is 20% of the premium. The charge comes down with every passing year, becoming nil after five years. Also, with most processes and marketing going online, operational charges and distribution costs have come down significantly.
The performance persistency of Ulips has also improved since the new version has been designed with a five-year lock-in. Hence, fund managers have a longer tenure to make your money grow. This lets them manage the funds efficiently and gives better returns to consumers.
A major cost that gets saved is the one on distribution. From what used to be ‘acquisition cost and maintenance cost’, low-cost Ulips operate efficiently thanks to online distribution channels. The rise of e-commerce in insurance and its acceptance by customers is giving a boost. Almost all insurers have invested in strengthening their online presence.
Ulips and mutual funds: The similarities
Though clearly different, the two are quite similar. Both are fundamentally the same as they invest your money in the stock market. Both have risks and generate long-term returns. Both offer tax benefits under Section 80C of the Income Tax Act and offer the options of one-time investment or systematic investment plan (SIP). They have a net asset value (NAV), which can be switched, entered and exited (though there are some restrictions based on an individual plan). Owing to this overlap, customers often debate which is a better investment option. With charges on Ulips going down, the line between the two has faded further.
What’s your pick?
You don’t have to demystify which is better among the two. You should instead ask questions such as what your goals are? Understand your requirement — whether you want to make an investment or buy insurance, or both? Do you want guaranteed returns or is some risk fine? Ulips have the potential to attract individuals who would otherwise remain uninsured. Note that if you are considering Ulips solely for insurance, it’s not a good option.
In their new form, Ulips have overcome many shortcomings of the older version. However, mutual funds do have a bit of a history to back their claim, unlike Ulips that have been a failure. consumer confidence is slightly tilted towards mutual funds, for now.
(Source: This article has been adapted from the article "Will meaner, leaner Ulips give MFs a run for their money?" that appeared on February 09, 2015 in financialexpress.com)