ULIPs or MFs+TermPlan

A friend of mine asked me to review a ULIP..my first question was why ULIP? Y not go for a combination of Mutual funds and Term Insurance. I did some googling and here r my findings :

So how does one go about comparing ULIPs vis-a-vis tax-saving funds? An illustration will help in putting things in perspective.

ULIP from ABC Company Ltd.
Age (Yrs) Term of
policy (Yrs)
Premium paying
term (Yrs)
Sum Assured
(Rs)
Premium
(Rs)
Maturity
amount (Rs)
30 10 10 10,00,000 1,00,000 15,20,375
Assumed returns rate : 10%
The figures used in the illustration above are based on that of an existing life insurance company.
The returns could vary across life insurance companies.

As can be seen from the table, an individual decides to invest in a ULIP having a sum assured of Rs 10,00,000 and tenure of 10 years. The premium for the same would be approximately Rs 1,00,000. The assumed rate of return is 10 per cent (compounded annualised). The entire investible amount can be invested in equities (in this particular plan). The maturity amount in the above example at the end of the tenure would be Rs 15,20,375. That is presuming that the investments grow at the rate of 10 per cent.

But company illustrations can often be misleading. That is because the returns calculated by life insurance companies are often on that portion of premium (i.e. premium paid - charges, charges include mortality charges, administration charges and fund management charges etc and can vary from 5 to 40%) . Therefore, the net return on Rs 100,000 works out to approximately 7.50 per cent in this illustration.

Let us take an example of an individual buying a term plan plus investing in a tax-saving fund.

Term plan from XYZ Company Ltd.
Age (Yrs) Sum Assured
(Rs)
Premium
(Rs)
Tenure
(Yrs)
Death benefit
(Rs)
30 15,00,000 3,600 10 15,00,000
The figures used in the illustration above are based on that of an existing life insurance company.
The returns could vary across life insurance companies.

As the table indicates, an individual, instead of investing the entire amount of Rs 1,00,000 in a ULIP, opts for a term plan from XYZ Company Ltd for a sum assured of Rs 15,00,000. The premium amounts to Rs 3,600 per annum.

Systematic investment plan
Amount invested
per month (Rs)*
Amount invested
per annum (Rs)*
Investment
tenure (Yrs)
Assumed
return (%)**
Maturity
value (Rs)
8,033 96,400 10 9.00 15,34,993
* Figures rounded off
** Compounded Annualised Return

In the table, we have assumed that the individual makes an investment of Rs 96,400 per annum (Rs 100,000 - Rs 3,600) in tax-saving funds. This amount is further divided into 12 parts for 12 months as we have also assumed that the individual will make regular monthly investments every year. We can see that the maturity value is still more than that of a ULIP.

Moreover, the best part about keeping one's investment needs and insurance needs apart is that both work towards their respective goals separately. Therefore, in case of an eventuality, the individual's nominees would stand to get not only the sum assured from the term plan (i.e. Rs 15,00,000) but also the amount that has been invested in a tax-saving fund.

Further, lets assume that instead of putting money in a Tax Saving fund, its put in a PPF at a ROI of 8.5% for 10 years.
PPF: A viable option
Amount Invested p.a. (Rs) Assumed Rate of Return Tenure (Yrs) Maturity Amount (Rs)
96,400 8.00% 10 14,57,247

He invests the remaining amount . The current rate on the PPF is 8%. At this rate, the individual’s maturity value after a period of 10 years would be approximately Rs 14,57,247.And for the insurance company to be able to give him an equivalent return on the ULIP, it would have to yield a return out of its skin so to speak.

And that’s not where the comparison ends. In case of an eventuality if we compare this scenario to the earlier endowment policy scenario, the individual stands to benefit more by buying a combination of a term plan plus investing in a PPF. Had an eventuality occurred say, in the 10th year after buying a term plan, the individual’s nominees would have got approximately Rs 15,20,375. In 10 years, he would have shelled out Rs 10,00,000. But instead, had he invested in a term plan plus a PPF, the beneficiaries would still have got the sum assured of Rs 15,00,000 on the term plan. But in addition, they would also have inherited the maturity amount on the PPF to the tune of Rs 14,56,247, which would have matured by the end of the 10th year-end. That is considerably more than what the nominees would have got had the individual invested all his money in an ULIP. This was possible only because insurance needs and investment needs were separated and both fulfilled their roles to the hilt.

Hence i wud suggest that u go for a combination of MFs and Term Plan if u r willing to do a lil bit of research (to find out best term plan and tax saving MFs) urself.

More on pros's and con's of these approaches in my next post

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