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Guaranteed ULIP Products - what you must know

Recently, there have been many launches of insurance plans that offer "guaranteed highest NAV" during the term of the insurance plan. Here we demystify these products for your, so you can be better informed about how they work.

ULIPs are exposed to market ups and downs

ULIP, or unit linked insurance plans are those where you buy a life insurance policy that comes clipped to an investment plan. Part of the premium you pay goes towards buying you protection on your life, and part of the premium goes towards buying "units" that invest in equity or debt instruments in the capital markets. These instruments are exposed to the randomness of the markets and prices can move around. For instance, during the 2008-09 period, our stock market first went down about 60%, and then has gone up about 100%. So, the price of the units, as measured in net asset value (NAV), can fluctuate a lot.

To a person buying a ULIP, there is always the risk that their capital invested in the units can be damaged or lost, if the markets are weak or volatile. Thus at maturity of the policy, one might not get a high return that one expected at the time of buying the ULIP.

Guaranteed ULIPs can help you avoid fluctuations

Insurance companies operating in India have come up with a structured product to overcome this potential risk of loss of damage to one's investment units in the ULIP. The structure works in the following manner. Whatever money is invested on your behalf is protected to the extent that you will get the highest price (NAV) of your investment during the term of the ULIP, even if at maturity of the plan the price is far lower.

Lets consider a simplistic example. Suppose Vidya buys an 8-year ULIP in 2010 and the investment units are priced at Rs 10 NAV. The price of the underlying equity and debt instruments is volatile, so the NAV fluctuates wildly from being as high as Rs 21 in year 3, to being as low as Rs 12 at maturity in year 8. Vidya will get maturity proceeds at the price of Rs 21, even though the NAV has dropped to Rs 12 at maturity. This is the "guaranteed" feature of this product - whatever the price at maturity, the policyholder is guaranteed the highest price during the term of the product.

Product Features

Term: Most of the plans are for an 8-10 year term

Premium Payment Term: Most plans you need to pay a premium for at least 3 years, however there is the feature where you can pay a single premium as well

Sum Assured: For the recurring premium option, its typically 5x the annual premium.

Death Benefit: In the unfortunate scenario where you die before the maturity of the policy, the guarantee is not applicable. You beneficiary will get the sum assured by the policy, and some products might also give you your fund value at the time of your death

Maturity Benefit: At maturity, you will receive the higher of the fund value or the guaranteed value of your units.

Withdrawals and Surrender: Subject to certain restrictions and charges, you can withdraw your money, but depending upon the insurance company you will get the NAV at that point in time.

Fees: Apart from the usual fees that ULIPs charge, you will be charged an annual additional investment guarantee charge of approximately 0.35% of policy fund value. This makes these plans costlier than normal ULIPs

Who should buy this ULIP?

ULIPs might be good products for someone who wants to buy an insurance cum investment plan for the long-term. If you are looking for a ULIP and are worried about market fluctuations and losing your capital, then it might be worth reviewing these guaranteed ULIP products.

Most insurance companies such as LIC, ICICI, Reliance, SBI Life, Bajaj Allianz among others offer this product. In each case some features and options might be different, but the basic feature of a guaranteed lock-in to the highest price during the term of the policy will be the same. Please remember that ULIPs can be risky products, and make sure you understand the nuances of the product you are getting.

Comments

Thanks for your comment

    

Chaitra Rama Murthy said : 29/09/2010	Would it be possible to review specific ULIP plans from these companies and provide your inputs ?