Get your maths right to gain from the new Ulips, says Srikumar Bondyopadhyay
Life insurance companies have started coming out with new unit-linked insurance plans to comply with the changed regulatory requirements. But are these new Ulips very different from what insurers were selling before September 1? Will these Ulips benefit policyholders more than before? Are there any pitfalls that prospective buyers should look into? Let’s take a look.
The first change came in the form of minimum premium size. Insurance companies have steeply increased the minimum premium size of their Ulips launched after September 1. Buying the schemes have now become a question of affordability.
Premium at a price
If you can afford Rs 3,000 a month as premium, you can consider buying a unit-linked plan.
Otherwise, you can save Rs 2,000 every month in a bank recurring deposit for one year and use the maturity proceeds to pay the annual premium. The minimum annual premium for a Ulip now stands at Rs 25,000.
This will certainly change the profile of Ulip customers — Ulip now becomes a product for people with deep pockets.
Since people who are financially better off can now afford a Ulip, the underwriting risks on the part of the insurers will definitely go down. This means the risk premium for the life cover (only) in a Ulip should come down.
But that has not happened. Instead, insurers have increased their mortality charges.
Charge jolt
When you buy a life insurance policy, the insurer deducts an amount from the premium to cover the risk of benefits payable on death. This is the actual cost of insurance, technically called the mortality charge. The mortality charge increases with the age of the policyholder because the probability of death increases as one grows older.
Under the new regulations, the minimum sum assured in a Ulip has been increased 10 times of the annualised premium from five times earlier.
Thus, with the increase in the minimum sum assured and increase in the mortality charges, a large part of your premium will go towards the cost of insurance.
Besides, there is a service tax levied in mortality premium. So, the service tax will also increase in new Ulips.
The third change that insurers have brought to their Ulips is in the deduction of premium allocation charge throughout the payment term of the premium, though the total premium allocation charge has been reduced to 28-30 per cent (of annualised premium) in new Ulips from 50-70 per cent earlier.
However, this saving towards premium allocation charge will be largely offset by the increase in mortality premium and service tax.
Insurers have also increased the premium allocation charge for single and top-up premiums to more than 3 per cent from 2 per cent.
Besides, some have also increased policy administration charges. For example, Bajaj Allianz Life has increased the policy administration charge from 1.5 per cent to 3 per cent.
In fact, there are many charges attached to a Ulip and insurers have revised the rates almost everywhere.
Marginal benefit
To get a better understanding of how the changes impact the investment yield in new Ulips vis-a-vis old ones, one can compare a similar Ulip from the same insurer for two different time periods.
According to the benefit illustration in Bajaj Allianz’s new Max Advantage plan, a 25-year-old policyholder paying an annual premium of Rs 50,000 will get a maturity benefit of Rs 4,33,601 after 10 years, assuming that the investment grows at 10 per cent per annum.
The same policyholder paying an annual premium of Rs 25,000 for the insurer’s Max Gain plan would have got a maturity benefit of Rs 2,76,159 after 10 years.
At a comparable premium level, the policyholder will get nearly Rs 1,18,000 less in the new unit-linked plan, Max Advantage. However, in Max Advantage,the death benefit is equal to the sum assured plus the investment fund value, while it is higher of the sum assured or the fund value in the case of Max Gain.
Besides, the premium paying term in Max Advantage is five years, while it is seven years for Max Gain.
It, thus, illustrates that policyholders will gain marginally under the new regulations.
Tax concern
The comparison will not be correct unless both the plans are comparable on equal terms.
Under the current provision of the income tax act, life insurance premium is tax deductible if the premium amount is not more than 20 per cent of the sum assured.
In the new direct taxes code, the tax deductible on life insurance premium has been changed.
Under the DTC, life insurance premium and survival benefits from a life insurance policy will be fully deductible if the sum assured is 20 times the annualised premium.
So, if you want tax exemption on the Max Advantage plan, the sum assured should be 20 times the annual premium and not 10 times that we have considered in the illustration.
If you increase the sum assured to 20 times, the mortality charge will also double, thereby reducing the part of the premium available for investment. In other words, the investment fund value will be much lower than what it is shown in the illustration.
If you choose anything lower than 20 times the sum assured, any benefit (except for death benefit) from a life insurance policy will attract tax liability under the new tax regime. So, before buying a Ulip ask your agent to work out the benefit illustration, taking into account all the charges under the plan and assuming a sum assured equivalent to 20 times the annualised premium. This way you will not feel disappointed after you have bought a Ulip.
From The Telegraph published on Sep 13, 2010
