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