SBI Life-SMART ULIP: Facts
Well, first let’s state a few facts about SBI Life-Smart Ulip. As per the official illustration and brochure of the SBI Life Insurance Company following facts come out about SMART ULIP:
1. Minimum annual premium is Rs 50,000. Premium paying term is 3 and 5 years while the policy term is 10 years.
2. Sum assured of SMART ULIP is 5 times the annual premium.
3. SMART ULIP offers only one fund option called “Flexi-Protect Fund”. While minimum investment in debt and equity is ‘NIL’, the maximum can be up to 100 per cent in both equity and debt.
4. As per the SBI Life-SMART ULIP official illustration which is based on a 40 year old individual paying an annual premium of Rs 50,000 for five years, maturity value at the end of 10 years is Rs. 3,03,469 if the invested money earns a rate of return (assumed) of 6% and Rs 4,09,954 if the invested money earns a rate of return (assumed) of 10%. Further, it states that ‘reduction in yield’ is 3.49% (for 6% interest rate) and 3.61% (for 10% interest rate), respectively. Put simply, as per the illustration IRR or the ‘Effective yield’ works out to be 2.51% and 6.39% for 6% and 10% rate of interest respectively.
However, if we calculate IRR of a cash outflow of Rs 50,000 each (at the beginning of first five years) and cash inflow of Rs 3,03,469 at the end of 10th year, IRR works out to be 2.44% instead of 2.51%. Similarly, for a cash inflow of Rs 4,09,954 the correct IRR is 6.33% and not 6.39%. However, this difference is not significant from the point of view of the purpose of this discussion.
5. The guaranteed NAV of SMART ULIP on maturity will be the highest of the NAV during the first seven years. In other words, if the NAV at the time of maturity (which is ten years) is less than the guaranteed NAV ( which will be the highest of the NAV during the first seven years) then guaranteed NAV will be payable.
SBI Life-SMART ULIP : Analysis
To better comprehend this analysis of SBI Life-SMART ULIP, you should first understand a few hidden secrets about ULIPs (Unit linked insurance plans). Now let’s analyse the features of SMART ULIP :
1. Low Risk Coverage: The risk coverage of SMART ULIP at just 5 times the annual premium is too low.
2. High Cost: SMART ULIP is a type I Ulip with an expense ratio of 3.61% (based on company illustration for a 40 year old individual) is too high as compared to expense ratio of best ULIPs based on IRR. In other word, IRR or ‘Net Yield’ of SMART ULIP is one of the lowest among all the ULIPs.
3. Lack of transparency: One of the advantage ULIPs have over traditional insurance plans is transparency. But, on this account also SMART ULIP is lacking. How? As per the brochure, while the minimum investment in equity and debt is specified as ‘NIL’, the maximum can be up to 100 per cent. Put another way, the company can invest in the debt and equity in any ratio as it deems fit since the fund investment is at the total discretion of the company. It is quite possible that the company may keep the majority or the entire investible surplus / funds parked in bank FDs and debt funds.
4. Lack of Flexibility: As there is only one fund option called “Flexi-Protect Fund’, the fund-switching facility in not available in SMART ULIP .
5. The Guarantee is meaningless: As regards the NAV guarantee in SMART ULIP, it is just another cheap marketing trick to garner more funds from unsuspecting investors. In fact, it is very unlikely that at the time of maturity NAV will be less than guaranteed NAV. It is highly improbable, if not impossible. Why?
First, please note that guaranteed NAV in SBI Life-SMART ULIP is the highest of the NAV during first seven years and not ten years (the duration of the Ulip plan). Second, the majority of the investment is probably going to be in debt. Now, tell me, what are the chances that the NAV at the end of 10thyear is going to be less than the NAV at the end of 7th year? Just go and ask any analyst or a portfolio manager and you’ll know.
The guarantee can make sense if the ULIP plan offers that the minimum investment in equity will be 50 per cent and the guaranteed NAV will be the highest of NAV during the entire term of the plan (and not just first seven years).
Finally, tell me do you pay any extra charges for getting assured returns from a PPF or a bank FD?
So, in summary, this Type-I ULIP product is low on insurance coverage with high expense ratio, lack of transparency & flexibility and no option for fund switching. These all demerits are on account of guaranteed NAV which is unlikely to materialize because anyway the maturity NAV will be higher than the guaranteed NAV.
This is my opinion. If you don’t agree or have a different point of view about the SBI Life-SMART ULIP , you can write in the Comment Box below.
Also see:6. 10 FAQs about ULIPs