Stay invested in Ulips for full benefit

Last month, the Insurance Regulatory and Development Authority announced a slew of measures to make unit-linked insurance plans more attractive for policyholders from October 1.

These included capping the difference between net and gross yields at 3 per cent, limiting fund management charges at 1.35 per cent and withdrawing the surrender charge for exits after four years.

"Earlier, in the absence of any guidelines on the illustration shown at the point of sale, insurers used to charge according to their expenses. As a result, policyholders were unaware of the different costs," said a senior executive of Life Insurance Corporation of India. With these changes, the regulator has made Ulips more attractive.

However, policyholders will have to stay invested for the entire period of the scheme to get these benefits.

Let's see how the changes will work. From October 1, insurers will give a benefit illustration of net and gross yields at 7 per cent and 10 per cent, respectively, as against an illustration of 6 per cent and 10 per cent, respectively, at present.

Therefore, the yield for policyholders has risen 1 per cent. To manage this, insurers will have to control their distributor/agent costs and fund management fees.

Further, by withdrawing surrender charges from fifth year onwards, Irda has given policyholders an option to exit if they are unhappy with the insurer or need funds.

If a policyholder wants to exit in the interim period of the policy term, he should remember that he will not be able to take advantage of the new guidelines.

"If an investor withdraws partially, does not pay the premium on time or switches funds frequently, he will not get good returns," said GLN Sarma, chief actuary, Bharti Axa Life Insurance Company.

According to him, Ulips do not come with guarantees. Also, returns are totally dependent on the performance of the fund. And while policyholders are allowed three to four free switches between various fund options (which include various combinations of debt and equity), moving your money too often can hit returns.

And while 10 per cent of the gross yield has to give net returns of 7 per cent, according to the new guidelines, any improvement in performance may not lead to an exact 3 per cent differential. This is because the fund management fees may go up in case the scheme performs better. So, a 15 per cent gross yield could mean 10-11 per cent returns.

The main benefit will be an increase in corpus. "While the new guidelines may not guarantee any substantial hike in returns, they will definitely increase the investible amount and possibly the returns as well," said the LIC executive.

But remember, it will be over a long period. This is because of the high costs involved in the initial years. And there are good chances that many of these, like distributor/agent cost, will continue to remain high.

But after third or fourth year, these costs will fall substantially, leading to a higher investible corpus. This, in turn, will lead to increase in returns. That is, what an investor loses out in the initial years will be made up to ensure that the difference between gross and net yields is 3 per cent.

A person who wishes to exit after the initial four years stands to lose. This is because most of the premium in these years will go towards premium allocation charges and other costs.