Tuesday 15 September 2015

Highest NAV Guaranteed ULIPs – The untold story

Now remember guarantees and stock markets don’t mix. The returns from the equity markets are not guaranteed. So in order to give you guaranteed returns these plans tend to shift their portfolio between debt and equity in such a way that that the plan’s highest NAV is locked by shifting a part of equity assets to debt. This debt portion is selected in such a way that its maturity value equals highest NAV reached.
Nowadays market is flooded with Highest NAV Guaranteed ULIPs like LIC Wealth Plus and Reliance Life Highest NAV Guaranteed Plan. These plans  give many people the wrong impression that they will get the highest returns from the stock markets. But is it true? Should you opt for it? Let us take a brief look at these plans and see if they are right for you.

Actual meaning of Highest NAV Guaranteed: If you think that you are earning the highest returns from the stock markets, then think again. It is not the highest returns from the stock markets that you get, but the highest NAV of the plan that the company assures you. E.g. if the highest NAV of the fund is Rs 20, that is what you stand to gain. However the returns from the stock markets could be far higher than that.

How do they work?: Now remember guarantees and stock markets don’t mix. The returns from the equity markets are not guaranteed. So in order to give you guaranteed returns these plans tend to shift their portfolio between debt and equity in such a way that that the plan’s highest NAV is locked by shifting a part of equity assets to debt. This debt portion is selected in such a way that its maturity value equals highest NAV reached.

E.g. if the highest NAV of the plan is Rs 15, the company will shift the asset allocation from equity to debt whose value at the end of maturity is Rs 15. This means you will gain Rs. 15, even if the highest NAV at the time of withdrawal is Rs. 12.

As the plan moves closer to maturity, a majority of the portfolio will be invested in debt, to ensure you get highest NAV.

Pros and cons of the products: The main benefit is you get capital guarantee right from the day 1. Also it is suitable for risk adverse investors who don’t want to expose their capital to undue risk. This is because as the product is primarily debt-based, it will protect their capital.

However this product does have its drawbacks. The main drawback of this plan is the charges. E.g. in Reliance Life Highest Guaranteed NAV plan, you are paying 20% towards premium allocation charge for the 1st year, which subsequently reduces to 3% for 2ndand 3rd year, 2% for 4th and 5th year and 1% from 6th year till end of the term. The policy administration charge is Rs 40 per month and fund management charge is 1.35% pa. But the biggest charge is 0.15% for guaranteeing the highest NAV. All these charges are quite high for mainly a debt-based product.

Moreover the fund manager can decide to allocate a major chunk of his portfolio towards debt right at the start of the plan. Also you don’t get the highest returns from the stock markets but rather the highest ULIP NAV reached by the fund. Besides the returns from these funds lie between 9-10%, slightly higher than the 100% debt funds.

Now if you decide to surrender the policy after 3 years or you die within a couple of years of starting the policy, you don’t get the highest NAV but the current value of your investment. So this product is meant for long-term investors only.

Should you opt for it: Avoid at all costs. Remember SEBI does not permit mutual funds and other stock market participants to guarantee the returns. So when any company offers you guaranteed returns, they are violating the SEBI guidelines. Also you don’t get to benefit from the primary benefit of market movements: buying more when the markets go down and less when the market goes up. 

This in turn will affect your returns. Moreover paying high charges for modest returns doesn’t make any sound investment sense. Don’t forget life is uncertain. You may die, you may lose your job or some unexpected expenses may crop up, due to which you will never be able to pay the premium. In this case you lose all the benefits of this plan. Lastly, remember all these companies exist mainly in the market to make money and are not to protect your money. So be careful.


[Source: http://blog.bankbazaar.com/highest-nav-guaranteed-ulips-the-untold-story/]

Tuesday 1 September 2015

Should you surrender your old frontloaded ULIP’s?


I was talking to some of the premium service members in the last one month and majority of them have invested in Unit Link Insurance Policies (ULIP’s) and want to surrender old frontloaded ULIP’s. One of the members was so much frustrated saying his agent has miss-sold these ULIP’s without providing adequate knowledge about this. Though I agree this to some extent, the primary responsibility in choosing an investment or insurance product lies with the investor itself. Should you surrender your old frontloaded ULIP’s?

What are ULIP’s?

Unit Linked Insurance Plans (ULIP’s) are those which act as insurance + investment products. These ULIP’s would charge premium allocation charges + policy administration charges etc. up to 30% of the premium paid in the initial 1 to 3 years. Gradually the allocation charges would reduce to 2% from 4th year onwards. There are some ULIP’s which indicated that 100% of first year premium paid would be the policy administration charges. Means you are paying heavy premium allocation charges to insurance company for the first 3 years along with the risk of surrender charges. During Sep-2010, IRDA has made some changes to these ULIP’s guidelines and put a cap on surrender charge to Rs 6,000 for first year gradually reducing it to Rs 2,000 for the fourth year. From fifth year, you need not pay any penalty charges. If you are among the crowds who have taken ULIP’s prior to Sep-2010, then the 3 year lock-in period would ends by Sep-2013. Such investors have been re-thinking whether they should surrender their old front loaded ULIP schemes or whether they should continue.
Points to be noted before you think of surrendering your old frontloaded ULIP’s

1)  Surrender Costs frontloaded: ULIP’s taken before Sep-2010 have charged heavy surrender / penalty costs. Means the costs are already front loaded in initial years from 1 to 3 years of policy term. If you observe, your fund value is very low comparing to yearly investment which you have done from 1st year to 3rd year. The premium allocation and policy administration charges are already reduced from your ULIP amounts. If you surrender such policies, you would lose the money. E.g. If you have invested Rs 100,000 per annum, for 3 years, your investment amount should have been Rs 300,000. However due to high premium allocation charges for first 3 years, your fund value after considering 10% return might be only Rs 2.4 Lakhs to Rs 2.5 Lakhs.  You would be incurring Rs 60,000 to Rs 70,000 as loss if you surrender such policy.

2)  What about your insurance coverage?
While you have taken the ULIP for both insurance coverage as well as investment purpose, before you pull out your ULIP you need to consider about insurance coverage. If you are in 50’s, getting a term insurance coverage now, would cost you very high. Also if you are an NRI, you cannot get online insurance policy. You need to keep these things in mind before closing ULIP’s

3)  How is your ULIP fund performing? 
If you observe, people talk about only hefty charges charged by insurance companies in initial years. What about the fund performance where you’re ULIPs have been invested? Ideally after considering all charges, the balance amount invested should provide good returns. The returns can range between 9% to 12% per annum. If your fund value indicates that it has provided lesser returns and is consistent under performer, you should think of surrendering your ULIP NAV.  The period of performance can be checked for 3 to 5 years to arrive at this decision.

4)  Zero refund for first year premium:
There are several ULIP’s issued earlier which contains a clause indicating that first year premium would be retained by insurance company for future benefits. Such benefits would be provided only if the insured would continue till the end of the policy. Means, if you surrender the ULIP policy in mid, you need to forgo your first year premium.

5)  ULIP’s sold after Sep-2010 – 5 year lock-in period – Refund only after lock-in period
If you have purchased ULIP’s after Sep-2010, these are issued with 5 year lock-in period. If you want to surrender such ULIP’s purchased after Sep-2010, then you would not get your premium refund immediately. The premiums paid would be credited to discontinued policy fund and insurance companies would pay back your money only after 5 year lock-in period along with interest.

Conclusion: If you have purchased ULIP prior to Sep-2010, think of such surrender / frontloaded costs before surrendering them. If your ULIP’s fund is performing well, it makes sense in continuing the ULIP instead of booking the loss and re-investing in other insurance or investment products.