Unit-linked life insurance offers the interesting option of combining protection and tax advantages of life insurance with the attractive prospects of investing in equities.
A unit-linked plan works on a minimum premium basis and not on a sum assured one. You decide the amount you can contribute at regular intervals. ULIP offers you insurance cover till your insurance needs are fulfilled, beyond that it becomes an investment avenue.
How they compare?
To explain how ULIP works we will compare HDFC ULIP Endowment plan with HDFC Endowment plan.
Premium
In case of: ULIP, you pay a minimum premium of Rs 10,000 per annum irrespective of age and term of the policy. Premiums levels can be either reduced or increased if premiums have been paid regularly for three years and the unit fund value is at least Rs 15,000. The flexibility of increasing premium contributions in an existing account helps policyholders manage their cash flows.
In normal/traditional endowment plans the premium is calculated on the basis of age and the term and the amount you pay, as premium remains the same for the full term. The minimum premium is Rs 1,500 annually.
Sum assured
The sum assured depends on your age and the cover you take in case of ULIP. Depending on your age at entry, you may choose between 3 levels of cover - low, medium or high.
In the traditional plan, the sum assured is calculated by age and term of the policy to which premium factor is applied.
Top-ups
Apart from your regular contributions, in case of ULIP, you can also make additional payments to increase the savings component. These top-ups do not affect the sum assured. Normal endowment policy does not offer you these benefits.
Investment
You choose the fund where you want to invest your money. HDFC offers a choice of five funds - liquid, defensive, secure managed, secure defensive and growth. The Liquid Fund is the least risky with investments in bank deposits and short-term money market instruments. Growth Fund is the riskiest with an investment of up to 100% in equities.
In traditional insurance plans your money is invested keeping in view the IRDA specification i.e.minimum 85% in debt with the balance in equities.
Charges?
As is the case with unit-linked plans, this plan, too, imposes charges, on both the funds invested by the policyholder and by cancellation of units. These charges vary depending on the kind of premium payment option chosen (single or regular).
Other charges include a fund management charge of 0.80% of the fund value per annum, apart from a flat fee of Rs 15 per month deducted by cancellation of units
In case of ULIP, for the first 2 years the investment content rate is 73% of the premium and for the remaining years 99%. Risk cover charges (for death sum assured, critical illness, accidental death)
In traditional plans, the charges are not disclosed. There is an annual fee of Rs 150 for regular premium policies and Rs 300 for single premium ones.
Returns
In case of ULIP, in an eventuality you receive the sum assured or fund value whichever is higher and on maturity the fund value. In normal endowment plan, in either case you receive the same benefit i.e. the sum assured and vested bonus.
In case you stop paying premiums?
If this is in the first 3 years then in case of ULIP, on cancellation of the policy before paying regular premium for 3 years, there is a charge of 25% of the outstanding premiums due during this 3-year period. In case of normal endowment the policy lapses and nothing is paid back
If you stop paying premiums after 3 years, in ULIP you have the option to make policy paid up, provided the policy has accumulated sufficient policy value. At present this amount is Rs 15,000. If the fund value of a paid up policy falls below Rs 15,000 then the policy is cancelled and the fund value is returned to you. The risk cover continues for the sum assured even though the policy has reached the paid up status.
In traditional plan the policy becomes a paid up policy.
Medicals
In both the plans the norms for medicals are similar i.e. medicals are compulsory.
What is the right strategy for you?
While making an investment in ULIP get the agent to disclose the costs. Compare across companies, product categories and within products. Insurance is a long-term contract, with low liquidity and potentially higher costs. Look at these costs before considering a ULIP for investment.
Want to know what suits you better -- an ULIP or a traditional endowment policy? We can help you find out. If you are in Mumbai and wish to meet our representative, please register here.
Money Simplified is an online quarterly guide from personalfn.com. The latest issue 'Save, Spend, Invest' deals with the smart way to plan your finances. For a free download, click here.