Jan 16, 2009

Best ULIPs based on IRR and Expense Ratios

Ulips (unit-linked insurance plans) are considered as one of the most complex financial products but it is not without any reasons. They combine the features of both mutual funds and insurance. First you have to choose the premium and the sum assured, then there are various fund options to choose from ranging from pure equity to pure debt.

But the main factor responsible for their complexity is the difficulty in comparing one ulip with the other due to varying charges--such as mortality, premium allocation, administration and fund management--levied in a different manner by different insurance companies. Some charges are deducted on annual basis and others on monthly basis. While some charges are based on premium amount, others are based on either the sum assured or on the fund value or on the type of fund option chosen. Some of the costs are deducted by cancellation of the units, others are deducted from the premium paid and still others are adjusted from NAV itself. Some are levied on flat basis and others are levied on per cent basis. Some charges are deducted only in the initial few years while others are levied during the entire tenure.

So many different charges, applied differently over different tenures by different insurance companies having different Ulip plans. Just Confused? So, how to make sense of all this? How to combine all of these charges together into one figure?

Well, here IRR (internal rate of return) comes to your rescue. However, even though all the way we keep on shouting that the best way to compare Ulips is to know their IRR, but it is well-nigh impossible for an uninitiated to do all these complex financial calculations him self or her self and arrive at IRR and expense ratios.

But nothing to worry about because since last year Outlook Money has initiated an effort to rank the Ulips based on cost and return parameters. First rankings were published in December 2007 and second one in December 2008.

As per the latest rankings of Ulips by the Outlook Money, following are the Top 10 Type I Ulips based on IRR:

1. Birla Sun Life--Classic Life Premier (8.07%)
2. Aviva Life-- Freedom Life Plan (7.82%)
3. AEGON Religare Life--Protect Gain (7.76%)
4. Kotak Mahindra Life--Long Life Wealth Plus (7.69%)
5. ING Vysya Life--High Life (7.62%)
6. Future Generali Life--Future Sanjeevani (7.58%)
7. TATA AIG Life--Invest Assure Flexi (7.42%)
8. IDBI FORTIS--Wealthsurance (7.42%)
9. MetLife-- Smart Gold (7.33%)
10.Reliance Life--Market Return (7.32%)

And here is a list of Top 10 Type II Ulips based on IRR:

1. Kotak Mahindra Life--Platinum Advantage (7.55%)
2. Birla Sun Life--Supreme Life (7.50%)
3. ING Vysya Life--High Life Plus (7.37%)
4. ICICI Prudential Life--Life Stage RP (7.18%)
5. ICICI Prudential Life--Life Stage Assure (6.98%)
6. Aviva Life--Life Saver Plus (6.82%)
7. Bajaj Allianz Life--New Family Gain (6.71%)
8. SBI Life--Horizon II (6.66%)
9. Aviva Life--Life Save Super (6.61%)
10.Birla Sun Life--Saral Jeevan (6.13%)

The above rankings by outlook money are based on assumed rate of return of 10% (the highest return allowed by IRDA for illustration purposes) and further assuming investment in 100% equity fund. Besides, the top 10 in type I category are out of total of 32 schemes ranked. In type II category there were only 10 schemes; therefore, all of them have been mentioned here.

But, what is actually meant by IRR of, say, 8.5% or 8%? And how does it make the difference in the returns you receive from Ulips?

An IRR of 8.5% means that if in the future the fund is able to generate a gross or total return of 10 per cent, the 1.5 per cent portion will be eaten away by all the expenses taken together and you’ll be left with a net return or net yield of 8.5%. Put another way, the expense ratio of an ulip having an IRR of 8.5% is 1.5% i.e., 1.5% of the fund value (or 15% of the returns generated) which goes towards meeting various ulip expenses (by whatever name called) and you receive a real return of 8.5%.

Put simply, the gap between the gross returns (here assumed at 10%) and the IRR shows the cost of the policy. Higher the IRR, lower the cost and vice-versa.

Classic Life Premier from Birla Sun Life is the lowest cost policy in the Type-I category and Platinum Advantage from Kotak Mahindra Life is lowest cost plan in the Type-II category. However, you can consider top 5 from each category as the best Ulips based on their low cost (i.e. high IRR).

Also, the IRR difference between top most plan in Type I and Type II categories is around 0.5% meaning thereby that type II Ulips are costlier than Type I Ulips because of the enhanced protection cover offered by the Type II policies.

Now, let’s come to the second question i.e. the impact of IRR on the actual returns received by you. Suppose that you pay an annual premium of Rs 50,000 for 20 years for an Ulip which is having an IRR of 10% (assuming actual gross returns of 12% and expense ratio of 2%). Thus, at the end of 20 years, you’ll receive Rs 31.50 lakh as the maturity proceeds of your Ulip. Now, suppose that instead of 10%, your Ulip generates an IRR of 9.5%. In this case you’ll receive Rs 29.63 lakh i.e., Rs 1.87 lakh less which is quite a substantial amount. If we increase the gross returns in the above example from 12 to 15%, then the total impact also increases to Rs 2.78 lakh. Further, if we double the annual premium payment from Rs 50,000 to Rs 1,00,000, the total impact on the final maturity proceeds rises to around 5.57 lakh.

Finally, please note that Ulip rankings based on IRR or expense ratio’s is only one side of the coin. Other side is the actual returns that the Ulip fund earns. More of it in a later post.

If you're interested to gain more insights into the Ulip mystery, please read "5 Secrets About ULIPs" and "1O Top Most Things to Know About ULIPs".


Also see:

1. SBI Life-SMART ULIP: Analysis

2. 10 FAQs about ULIPs

3. Top 5 Misconceptions about Life Insurance

4. Capping of ULIP Charges by IRDA - A Review

5. Best ELSS for FY 2009-10

34 comments:

  1. Hi, pls answer my query:I invested in aviva life saver plus in the year 2007, with an annual premium of Rs.100,000/-
    i wanted to invest in this long term.....15 years+
    I came across your blog and was shocked at how little i knew about ulip products after i read ur blog.
    Do you think its a sensible investment? Should i continue in this investment? if not, is there a way out for me. I do not want to lose the money invested by me so far....Rs2,00,000/-
    I also have an option of reducing the annual premium amount.....from 3rd year onwards(this year). Pls advice.
    Thanks
    Shalu Mehra

    ReplyDelete
  2. Shalu,the best course of action for you is to surrender the ULIP anytime after paying premiums for 5 years.

    Pay third year premium from your own pocket. The 4th & 5th year premium can be paid by making partial withdrawals from the ULIP.

    Meanwhile, you should make best use of ‘free switching’ facility. And please don’t forget to buy a good term plan.

    Furthermore, follow the above advice only if you can resist the temptation to buy another ULIP in future. Otherwise, it is better to continue it.

    ReplyDelete
  3. Thank You very much for your advice. I do appreciate it. However, when you say that i must pay the premium for the 3rd year, should i pay the minimum that i can i.e Rs.15,000/- or should i pay Rs.1,00,000/-
    Regards

    ReplyDelete
  4. Shalu: As per the brochure of ‘AVIVA LifeSaver Plus’ Ulip (available with me), there is no mention of any feature which allows you to pay a minimum premium of Rs 15,000 (instead of Rs 1 lakh regular premium). So, kindly check your policy document once again.

    And, if you still find it there, you’ll have to send a scanned copy of your policy document by mail to feedback [at] themoneyquest [dot] com.

    ReplyDelete
  5. Hi, i checked my policy document....it says in that from the policy's 1st anniversary, onwards, i have the option of increasing/decreasing premium and that the annual premium should not be less than Rs.15,000/-.
    My policy was purchased on 23 Nov 2007. I understand that from 1st Jan'08, there was a change in the policy and subsequent to that change, the increase/decrease in premium is allowed from the 4th year....
    I will send you the scanned document by eod today or tomorrow in any way....
    If it is allowed as per my policy, would you recommend that i reduce premium this year onwards?Thanks

    ReplyDelete
  6. Shalu: I'll advise you only after reading the entire policy document.

    ReplyDelete
  7. Sir,

    thanks for enlightening me on the ULIPs. I would be grateful if you could clarify my doubts on SBI Life Horizon II pension plan ULIP. I am Paying Rs 40000 annual premium and paid Rs 100000/- by now. The fund value now is
    105800/-. Is it good to continue for next 10 years ? what would be the total amount at the end of 10 years by conservative estimate ?

    Also, if possible, kindly tell me about the best SIP for next 8 years.

    thanks and regards
    Deepak New delhi: e mail: dku786@gmail.com

    ReplyDelete
  8. Deepak: This post is about best life insurance ULIPs based on IRR. I’ve yet to touch upon the topic of pension ULIPs. So, I’ll answer your question some other time.

    ReplyDelete
  9. Dear Fisher,

    Thanks. I would be waiting for your
    razor sharp analysis on my queries. regards. deepak

    ReplyDelete
  10. Hi, I would really appreciate if you can answer my query. I have invested 2 lacs in LIC profit plus ULIP policy..Please let me knw, if it was a right choice.
    Should i continue in this investment or shld i switch to some other plans? Pls advice.
    Thanks
    Surya

    ReplyDelete
  11. Surya: Why don’t you help yourself?

    I had already written a lot of stuff about ULIPs. Just spare a few minutes to go through it and find out whether your decision was correct. Following this approach will help you become a lot wiser.

    ReplyDelete
  12. Hello ,
    My age is 29 years and I have Metlife Smart Premier Plan as mentioned. Multiplier option
    SA: 1,200,000, Date of maturity: 02/06/2080
    Policy Term: 74 years, Premium paying period: 74 years. Yearly premium of 48000.
    I have paid 144,000 as of date.
    Please advice if I should continue with this policy. I do not see any increase in my fund value
    -Vaishali

    ReplyDelete
  13. Hi,

    i am investing 2 premiums 65000 pa + 50000 pa in max life ulip policy for a term of 15 years.
    How much can i expect at the end of my term.
    I am quite afraid after reading your blog about my savings since max life is no where mentioned as a good one
    Please suggest me since i heard that ulip is best way to invest for long term i blindly did that without much knowledge.
    Thanks,
    Anusha

    ReplyDelete
  14. Anusha: It’s never too late to start learning. If you’re really interested in managing your investments, there’s only one possible way to achieve it – Get informed. For that you need to devote some time to read this blog. I can only promise that your efforts will not go unrewarded.

    ReplyDelete
  15. Dear Fisher,

    I would be grateful if you please tell me which are the latest best ulip plans in which i can invest Rs.50,000/- p.a. My preference is for SBI and LIC.

    ReplyDelete
  16. Mahen: Sorry, I don’t recommend investing in ULIPs.

    ReplyDelete
  17. Hi Fisher

    Your blog is quite informative.In 0ct2009,I took a metlife smart plus ulip plan for a premium of 1Lakh/annum.What should I do to get out of it ? Please advise.

    -sravanthi

    ReplyDelete
  18. Sravanthi: Please read "how to get rid of a life insurance policy". You can find the link in the archives section.

    ReplyDelete
  19. Dear Fisher
    I am 26 years old and just about finding my feet in the shark infested dark murky waters of personal finance. I am in the merchant navy & am looking out for a ULIP. I have a premium paying capacity of about a lac. I have inquired about Tata AIG Life's Invest Assure Flexi Plus Plan as well as Canara HSBC Life's Stay Smart Plan. I would really appreciate it if you with your vast knowledge and experience could guide me toward a sound plan. Any better plans in your view would also be appreciated. Thanks.

    ReplyDelete
  20. all recommendations are based primarily around IRR for returns. What about the actual fund management? dont better run funds giver better returns in long term? is that also factored in rankings?

    ReplyDelete
  21. Farshid,

    Could you please tell me why do you want to invest in ULIPs?

    ReplyDelete
  22. Dear Fisher
    As you might be aware of the hazards associated with my profession I was looking out for life cover. I was advised by my bankers HSBC to go in for their HSBC Smartlife Plan, which is a whole of life plan. However when I received the counter offer I found that my mortality rate had increased from about Rs. 1 per 1000 to above 3 per 1000. Hence, I found out about Tata AIG and they offered me a flat 1.30 per 1000. HSBC claims to give better returns but one cannot be assured of that. Are there any other suitable investments I could make apart from ULIPs. I looking forward to purchasing property in the near future and hence would not like to make very large commitments now. Thanks

    ReplyDelete
  23. Farshid,

    Why don’t you consider pure term plans for life insurance and mutual funds for investments? This is a far better alternative than investing in ULIPs.

    Making the right financial decisions at this point of your life can make a substantial difference to your personal finances. It will be a lot better if you can spare some time to read this blog... go to archives section and read…

    1. Most Amazing Fact about Life Insurance
    2. Life Insurance Term Plans – Lesser Known Facts
    3. What is the right time to buy a house?

    ReplyDelete
  24. Dear Fisher

    Thanks so much for taking the trouble to help me. I will indeed go through the archives and consider a pure term plan & a mutual fund alternative.

    Thanks

    ReplyDelete
  25. Hi Fisher,

    My take home every month including allowence is 45,000 , i am 25 year old and about to get married. My current investments are :
    1: 70,000 in PPF Per anum
    2: 12,000 in LIC money backup policy per anum.

    Apart from the above i would like to start investing around 15 to 20 k per month for mid/long term goals.

    Could you please give me a break up of how much to invest in what, would be a great help for me.

    Regards,
    Jai

    ReplyDelete
  26. Jai,

    Your current portfolio is highly skewed towards debt. You should consider investing small amounts regularly in some good diversified equity mutual funds. Also invest around 5% of your total portfolio in gold ETFs.

    Further, if possible get rid of LIC money back policy and instead buy a good term insurance plan.

    ReplyDelete
  27. Hi,

    I am a 25 year old man. I have just started my career with an initial monthly take home of Rs. 35000 . I have purchased an LIC jeevan saral policy with a monthly premium of Rs. 5000 with lock in period of 35 yrs. Apart from this i have a surplus of around Rs.10000 to invest. I am looking for some good return short term investment with moderate to high risk factor. My lock in period can be from 2 to 3 yrs. Please suggest some good investment plan or any additional long term option suiting my profile.

    ReplyDelete
  28. Hi Fisher, Your post is very helpful in explaining the various options. I have 2 questions:
    (1) My question is specific to the Canara HSBC Stay Smart plan. My relationship manager at HSBC told me that this is a life-time tax-free plan(none of the premiums over the year, one-time payments are taxable). Can you please confirm if this statement is valid or I've misunderstood something? He said that this was the only kind of offering in the market because of this feature. Can you tell me the loop holes in this?

    (2) I'm 31, recently married with both of us working. I'm working on a freelance basis so no regular income. we own a house. I'm looking for a long term investment strategy. What do you recommend as yearly investment of 1.2 lacs, where should I put that money in for a 10-year horizon?

    Thanks a lot,

    Leila.

    ReplyDelete
  29. Hey Leila,

    I am an NRI banking customer with HSBC. I had been approached by my CRM to go in for the HSBC Canara Life Stay Smart Plan. I would just like to give you a word of caution.

    I had been shown a sales illustration for a cover of 35 lacs with an annual premium of 1 lac with a premium paying term of 10 yrs. The mortality charges shown to me at that time were around 1.35 per 1000 rs. As I am in the merchant navy, I was told that I would be having a change in the mortality charges as decided upon by the underwriter, to which I agreed. However, when I received the counter offer I was surprised to see an increase in the mortality charges to 3.65 per 1000. On inquiring with the Bank nobody could explain to me how they had arrived at this figure. They were somehow trying to justify it but could not explain the basis of calculation for it. So I decided to cancel my policy. What must be noted here is that the bank had already debited my premium from my account. Also what I learned is that this is a standard practice by most insurance companies. They accept money first before your proposal having been put forth the underwriter. In this standard practice (as they claim), the customer stands to lose as :
    1) You are not insured till the underwriter accepts the proposal.
    2) You lose out on interest on the money, which the insurance companies earn by depositing your money.
    3) Also in case of an NRE account it becomes difficult to credit the same back into the account, as was the case with me.

    So I advise you do be firm with them and refrain from allowing them to cash in onto your hard earned money until the proposal has been agreed upon by the underwriters, etc.

    Also, HSBC Canara Insurance does not offer any riders at the moment.

    I suggest stick to the best in the business - LIC. Also rather than opting for a ULIP go in for a pure term plan or endowment plan and you could save in some other investment schemes that offer guaranteed returns or otherwise in SIPs....

    Fisher, hope I have given some sound advice here.

    Regards
    Farshid

    ReplyDelete
  30. Hi Fisher,
    Firstly thanks for your very insightful articles which have really helped increase my financial awareness.
    Coming straight to the point..I need your opinion. I have a BSL Flexi Life line (Whole Life) ULIP (Enhancer option) purchased in Sep 2005 (don't know how I got conned by the Citi agent into purchasing this) with an annual premium of 50K. I am now convinced that this is not a good investment from a return perspective and plan to surrender this in Oct 2010 (after the mandatory five years is over). I want to know if the Fund value received then would be fully tax free?

    Once again...your articles are superb and keep them going.

    Thanks,
    Shailesh

    ReplyDelete
  31. Shailesh,

    Yes, the fund value of a Ulip surrendered after 5 years is completely exempt from tax.

    ReplyDelete
  32. hai, this is Surya, and i have a 2+yrs daughter. i would to invest some money, so that it will be helpful for her higher educational plans. I can invest 20000 to 30000 (INR) per annum for about 15 years duration. can u suggest me a wise investment idea.

    ReplyDelete
  33. if u wish, i can suggest u a good ULIP fund which can gv u life-time cover (upto age 99), having 0-risk & generate good decent returns with a proven world-wide track record.
    Ruchi Kedia
    kediaruchi@gmail.com
    Richhpal Financials

    ReplyDelete
  34. Hello i have invested 75000 in Tata AIA Life InvestAssure Flexi Supreme(UIN - 110L090V01) in year 2011,feb now previous year i did not paid the premium and my fund go into discontinued policy fund. i want to know when i will get my money back. and how much.

    ReplyDelete

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