About five to 10 years ago ULIPs were energetically sold and sometimes mis-sold to the public, giving them a bad name amongst India’s retail investors. Since then, the regulator Insurance Regulatory Development Authority of India (IRDA) and the industry itself have conducted a major clean-up, capping charges and stopping the loss of premiums due to missed payments in subsequent policy years (low persistency).
Some insurers such as Bajaj Allianz have gone one step further, bringing out low-cost online ULIPs to offer a real alternative to other investment products, including mutual funds. We recently reviewed one of these, Bajaj Allianz Goal Assure and liked what we saw – low costs, high performing funds and a diverse set of investment strategies. This prompted us to approach the man behind them, Tarun Chugh, CEO of Bajaj Allianz Life Insurance, and ask him a bit more about what makes them a good deal. Here is what he has to say:
ULIPs were regarded as high-cost products where people forfeited their money as a result of missing a few premium payments. What has changed? How are new-age ULIPs different from the products that existed previously?
There have been significant interventions to enhance ULIPs and make them a value-packed investment option for long-term life goals.
First, the fund management charges are capped at 1.35%. Next, all charges – premium allocation charges, policy administration charges, fund management charges are capped for each policy year. In fact, the annual charges (net reduction in yield) at maturity can be a maximum of 2.25% for a policy with a term of over 10 years.
Further, there is also a cap on the maximum discontinuance/surrender charge. It depends on the policy year when the policy is discontinued/surrendered and is applicable only in the first four policy years. If the policyholder is unable to pay the due premiums during the first five policy years, the policy shall be converted to a discontinued policy and the fund value will be transferred to a discontinued policy fund, wherein it will continue to earn applicable returns.
Keeping these charges capped, the regulator has ensured the ULIP makes a stronger investment proposition for customers.
Following the introduction of the Long-Term Capital Gains Tax (LTCG) on equity mutual funds, is the tax-treatment of ULIPs more favourable? Will it make a big difference to investor returns?
ULIPs always enjoyed a tax benefit, however, we believe that customers are in it for their long-term benefit as well. With the newer tax structure in place, yes the value of a ULIP as an investment product will be further enhanced.
How does ULIP fund performance compare with mutual funds? How have Bajaj Allianz Life Insurance funds performed?
Generally speaking, ULIPs are designed to help achieve long-term life goals. They help customers have a disciplined investment approach, and enable customers to tide over market volatility. Time in the market impacts one’s investment in it, and which is what the ULIP does. Data has proven that ULIP fund performance over the 5 or 10-year period has beaten benchmark and peer groups’ performance.
Coming to Bajaj Allianz Life Insurance. We are amongst one of the most capable and experienced fund management companies in India. Our funds have managed to perform over market cycles, capturing the upside during up-market cycles and at the same time protecting downside risk during market downturns.
Here are some examples:
Bajaj Allianz Life Equity Growth Fund and Bajaj Allianz Pure Stock Fund (key large-cap equity ULIP funds) have managed to beat the benchmark index in 100% of the rolling period observations (using 3-year rolling returns over a 10-year period, with monthly shift).
Bajaj Allianz Accelerator Mid-Cap Fund and Bajaj Allianz Accelerator Mid-Cap Fund 2 (key midcap equity funds) have outperformed the benchmark index in 100% of the rolling period observations (using 3-year rolling returns over a 5-year period, with monthly shift). As per Morningstar, our Pure Stock Fund has a downside capture ratio of 57 versus 84 for the peer ULIP large-cap category over a 10 year period (ended March 2018).
Mutual Funds have numerous categories such as large cap, small cap, balance, income etc. Is there sufficient choice of fund types within the ULIP structure?
ULIPs offer several fund categories as well – from large and mid-cap, ethical and index equity funds, to bond fund, short-term bond fund, liquid fund, and asset allocation fund. We also have various investment and asset allocation strategies for investors who find it difficult to decide on their own.
The other benefit with ULIPs is switching. We offer multiple fund switches at no additional charge. The icing on the cake is that within an insurance product, fund switches are not subject to any capital gains tax. This provides flexibility to investors to re-balance their asset allocation, or review and change it without any tax overhang issues.
SIPs in mutual fund average out the purchase price and reduce my risk. Do ULIPs have monthly SIPs?
ULIPs have a monthly mode premium payment option wherein a fixed premium will be allocated to funds. This enables customers to have a disciplined approach towards their life goals investments, and also enjoy the advantage of rupee-cost averaging. This helps customers buy more units when prices are low and less when they are high.
Can I give a bank mandate for auto-debit of my ULIP premium? I worry about forgetting when my premium is due and losing policy benefits.
Yes, customers have the option of auto debit from their bank accounts towards premium payment. Alternatively, they can provide standing instructions to their credit or debit cards and net banking towards premium payment.
Assume a customer needs money for higher education after five years but isn’t sure of it. He simply wants the option to withdraw. How will a ULIP help with this?
There are options available to customers to make partial withdrawals (subject to withdrawal conditions) or surrender the policy after completion of first five policy years. When a customer surrenders a policy any time after the fourth policy year, there is no surrender charge and they will receive 100% of the fund value at the end of the 5th policy year. However, the policy gets terminated.
Can I get an education loan against my ULIP? How about a Home Loan?
A loan on a ULIP isn’t allowed as per the insurance regulations in India.
Can a customer withdraw from a ULIP in case of emergencies, such as a medical emergency?
As mentioned above, there are options for making partial withdrawals in a ULIP. While it is essential to stay invested in any ULIP through the policy term, there are options available in case they are unable to pay due premiums towards a policy due to financial emergencies: When premium payment is discontinued in the first five policy years the policy will be converted to a discontinued policy, and the discontinued fund value will be available to the customers at the end of the fifth policy year
When premium payment is discontinued after the first five policy years the policyholder can write to the life insurer to convert the policy to a paid-up policy wherein no future premiums are required to be paid. All applicable policy benefits will be available to the customer until the end of the policy tenure.
Can a customer invest money in a ULIP as a one-time addition, like a lump sum investment in a mutual fund?
ULIPs have a top-up option that customers can avail. The tax benefit on maturity benefit of top-ups will be as per the Income Tax Act. (Editor: Check with your tax advisor on how additional top-ups are treated as per the Income Tax Act).
Does switching between different funds in a ULIP attract exit load and capital gains tax?
Switching is one of the key features of ULIPs, which gives customers the flexibility to switch between different funds of different asset classes without any exit load or any implication of capital gains tax.
Are online ULIPs cheaper than buying from an insurance agent? How much is the difference, on average?
A simple answer to that question is yes. Buying ULIPs online is cheaper as agent commission is moved out from the equation. This difference will vary from product to product and company to company.
Going forward, how do you see the position of ULIPs evolving in the portfolio of an average Indian household?
Given the overall investment environment and the need of today’s retail investors, ULIPs are turning out to be a good investment option for long-term life goals. Data has proven that the fund performance of ULIPs over 5-10 year horizons has been consistent and strong. This along with value features being introduced, making the product transparent and non-complexity is helping ULIPs become the investment product of choice.
When should a person buy a ULIP?
One can start investing any time, depending on their life goals. Earlier the better; however, nothing stops a 40-year old or a 50-year old to start investing towards a life goal they want to achieve.
If you’d like to start investing, take a couple of minutes and understand what Life Goal you are investing towards. In our ULIP, one can start with as little as INR 3,000 per month. But, let this investment be goal-based, and over a period of 5-10 years to ensure you are making the most of your investment.