ULIP – What is under the sugar coating ?

Posted by: moneyindia on: January 26, 2007

In: Financial Planning| Ganesh| Life Insurance| ULIP| ULIP Vs MF| money
Comment!

Personally, I am not for comparing ULIP and MF Investments. It is unfair to compare apples and oranges. But market conditions demand one such comparison. I thought of taking a case study. A 30 year old male is looking for Insurance and Investment. He has planned to invest Rs. 1 lakh a year. Now, he has two options 1) Take a ULIP or 2) Take a Term Insurance and invest the rest in MF scheme.

Key inputs :
Yearly contribution – Rs. 1 lakh
Insurance Cover planned – Rs. 25 lakhs (Why 25 lakhs and not less ? Average yearly income of a professional of 30 years would be 5 lakhs p.a. As a thumb rule, he should atleast have 5 times of annual income as cover for life)
Term – Maximum of 30 years
Assumed Return – 15% compounded annualised

ULIP (Option 1):
I have taken HDFC Standard Life’s Unit Linked Endowment Plus, as this is one plan which has got the least fund management charges of 0.8%. In the long run, more than the investment content rate it is the fund management charge that makes a lot of difference. Hence the selection of this particular plan. I have also assumed that the Proposer chooses “growth fund” where there is maximum equity contribution upto 100%. The allocation rate for the first year is 40% and from then on it is 99%.

ULIP Charges :
Other charges include policy administration fee of Rs.20/- per month & mortality charges for providing death benefit. These charges are absorbed by cancelling units proportionately from the chosen fund.

He chooses to invest the entire 1 lakh in this plan with an insurance cover for 25 lakhs.

(Option 2) Term Assurance :
I have taken quote from HDFC Standard Life (one among the cheapest) for a pure risk cover of 25 lakhs, without any riders as is the case with ULIP shown above. For 25 lakhs of pure risk cover, annual premium including service tax would be Rs. 9,372/-. Out of 1 lakh the balance would be Rs. 90,628/-

MF :
I have assumed that the person invests in ELSS to avail tax benefits u/s 80c for the entire contribution. This is to provide justice to the comparison. Both options 1) and 2) provide tax benefits u/s 80c as of now. Rs.90,628/- is invested in ELSS every year.

MF Charges :
MF Charges taken into consideration for comparison include : a) entry load @ 2.25% b) Expense ratio @ 2%

Having decided the products, the next big question is how to compare the two ?
Let us take periods of 5 years and see what happens if the person dies. In such an eventuality, What is the benefit available to the nominee / beneficiary ?

And here it is……………..

B E N E F I T A V A I L A B L E T O F A M I L Y
Death Age Option 1 Option 2 Difference (%)
31 Rs. 25 lakhs Rs.27.1 lakh 8.4
35 Rs. 25 lakhs Rs. 33.3 lakh 33.2
40 Rs. 25 lakhs Rs. 46.56 lakh 86.24
45 Rs. 44.77 lakhs Rs. 70.62 lakh 57.73
50 Rs. 93.98 lakhs Rs. 1.14 crore 21.30
55 Rs. 1.89 crore Rs. 1.93 crore 2.11
60 Rs. 3.25 crore Rs. 3.38 crore 4

So, I am definitely voting for Term + MF. How about you ?

Insurance needs and Investment needs are different is the verdict.