Are ULIPs getting better?

I was recently approached by an insurance agent with a ULIP. Even though I was not willing to take the policy, he wanted to present the plan and get my feedback. 

The plan in question is Birla Sun Life’s Classic Endowment Plan . The basic sum assured for the plan presented to me was Rs.3,75,000. But paying an extra premium I can get the life cover enhanced to whatever I prefer. In this case, we took the enhanced sum assured as Rs. 18,00,000.  Policy paying term is 10 years (I pay for only 10 years) and the policy term is for 30 years (I get cover for 30 years). For a 33 year old male, the annual policy worked out to Rs.36,538. (total pay-out of Rs.3,65,380)

• If the life insured survives the term, the maturity benefit will be the Fund Value at maturity.

• In the event of the death of the life insured prior to maturity, the nominee will receive the greater of either the Fund Value or the Basic Sum Assured (provided there are no partial withdrawals)

• Policy can be surrendered after the completion of five policy years, and receive the Fund Value at that time.

To analyse this I put this in an excel sheet and compared it against a term plan + any other investment (with returns same as that of the sales illustration, which was 6%).

Term plans rates have come down drastically these days with Aegon Religare and ICICI Prundential launching aggressively priced products such the iTerm and iProtect. For a 33 year old non-smoking male, iProtect provided the lowest quote of Rs.4,660. After considering service tax, cess, etc. let us take the annual premium as Rs.5,400. This needs to be paid each year for 30 years.

The remaining amount (Rs.3,65,380 – 30 x Rs.5,400) of Rs.2,03,380 is equally divided into 10 yearly instalments and invested in say an equity mutual fund returning 6%. I have not considered any expense charges the returns for Classic Endowment Plan is shown at 6% gross returns.

• If the life insured survives the term, the maturity benefit will be the Fund Value at maturity.

• In the event of the death of the life insured prior to maturity, the nominee will receive the Fund Value plus the Sum Assured

• Policy can be surrendered any time to claim the Fund Value at that time.

The illustration of the two cases is provided in this excel sheet.

The result is not very surprising. Term plan plus mutual fund is still better than the ULIP. But an interesting thing is that the difference after 30 years is not much. In fact, till around 22 years the ULIP fund remains better. Of course, the death benefit is better for term plan plus mutual fund as the death benefit will be the Fund Value plus Sum Assured.

But the point that I want to make is that ULIPs have changed (in fact still changing) for the good. For those averse to “zero returns” insurance plans can consider cost effective ULIPs like the Birla Sun Life Classic Endowment Plan to get dual benefits of sufficient life cover (especially for longer terms) and decent equity returns.

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information.