Ulips are good…

I had to do this column. Not because ulips are God’s gift to mankind, but unit linked insurance plan that I bought (circa 2004, much before the media decided that ulips are bad). I bought unit linked insurance (and continue to own them) from Hdfc Standard Life Insurance company.

Here are the details for the ones who are mathematically inclined. My insurance premium was Rs. 8000 per month (approximately Rs. 1L a year) and the sum assured was Rs. 20 lakhs (even if it was Rs. 5 lakhs it would have been tax free).

In the first month I paid Rs. 8000 and immediately topped it up with Rs. 3 lakhs. I did this for 2004, 05, 06, skipped 07, topped up again in 08, 09 and 2010. The administrative cost is Rs. 15 per month, the asset management charges are 0.8% (there is no cheaper amc product in the country today – other than ETF).

The risk charges have disappeared (the value of the fund is more than the sum assured). It is a decently well managed fund and thanks to the charges (including mortality charges) this fund of mine has done as well as some of the top mutual fund schemes.

I have no regrets, yes the life cover is over..but I have a 24 year contract which started in 2004 at amc charges of 0.8%. Yes it had a high entry load – I think about 40%, but I overcame that by topping up every year from the first year. For those of you who are good in excel try doing this:

Premium Rs. 100,000. Sum assured Rs. 20 lakhs. Top up (99% is invested – and has a cap of 20% of sum assured minus the regular premium) administration charges of Rs.15 per month, asset mgt. charges 0.8% – and a CAGR of 15% over 25 years. Assume top ups only till you reach the sum assured in the accumulated value.

The unit linked endowment plan of Hdfc Standard life bought in 2004, will beat the Hdfc Top 200 – not because it has superior fund managers, but the charging structure allows it to charge less, much less.

Learning:

The only protection against bad financial products is SELF learning. Nobody is here to teach you for free. You want a free lunch? Go to a langar or a temple. No banker, adviser, blogger, author is here to customize ‘gyan’. What you get free is some general pointers like:

‘Ulips are bad’ : some joker like subramoney then gives you articles that prove it wrong.

‘Equity is good in the long run’: Look at Japan, and it will be proved wrong.

‘A company that good service is good for the shareholder’: Look at Jet Airways.

‘A company which damages society is bad for the shareholder’: Look at Mcdonalds, Coke, Pepsi, ITC, Citibank..

‘Obama will save the economy’: see under jokes column. Annual PR budget of the financial service industry in the US is $ 5 billion – spent equally between the R and the Democrats. So laugh when Obama says ‘change’. In India only bhikari’s ask for so much change. Others know to really matter you need notes, not loose change.

Blogs like mine are run for fun, for poking you, for poking at the whole world, for selling my book (please buy it from flipcart – there is a link here), – if you learn something here, I am thrilled. This is meant to entertain, poke, …and accidentally educate.

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26 Responses to “Ulips are good…”

  1. Subra, We all have learned a lot from your thoughts (accidentally :) )

  2. a colleague bought a SINGLE PREMIUM PENSION plan paying Rs. 25,000. Next week he topped it up with an EIGHT DIGIT cheque! Imagine the bank RM’s face!

    Another friend bought a pension plan (single premium) for Rs. 25k, then pays Rs. 15L every year into it as a top up :).

    So it is about intelligent buying …and that comes with using ones brain :)

  3. Amazing! Who told you that you could “Top up”? The advisor or you found it yourself? In any case, it’s brilliant!

    And “In India, only bhikharis ask for change” has me grasping for breath!! :) Where do you get such enlightened thoughts!! :). Though the day is not far, when they will refuse change and ask for notes!

  4. Ranjan

    I am so sick of the financial media that they keep saying the same things..and dare not think. Nor do they allow their readers to think. Tell me in the last 10 years have you seen EVEN ONE article of how a claim settlement has helped a family? The media keeps cribbing about ULIP. Is having NO INSURANCE better than having an expensive ulip? One expert on the media asked me is IRR same as ICR (ICR is the investment content ratio – i.e. premium minus load)- not in an insurance class but while doing a story on insurance :). I got tired of hearing ‘Ulip is bad’ hence the article.

  5. haha..nice one@Change is for bhikaris. need to let this on to some of my Tea party friends

  6. Maybe you should have come up with this post couple of months back, before they changed the rules for ULIPs

  7. no this rule of how much you can top up changed long back. Many changes which IRDA made ‘supposedly for the good of the consumer’ have surprised me. Top up limits, rider premium to be less than main premium are 2 of the important ones..:)

  8. Thanks for the clarification on top ups. So what you think of ULIPs as of today?

  9. i think, the catch here is ‘top up’ and of course the fund manager and your luck, the period 2003-07 ! but for a lay investor and for whom, ‘top up’ is not possible, the financial media is not at the fault. however it is very heartening to know how different thinking could lead different outcome. thank you very much for enlighting idea.

  10. ULIP used to be a good idea, but not in the current form! Also it is too, too, too complicated to know how to buy it. Also once a product is popular, they could tweak some changes – and this could completely change the answer. So it makes sense to take a term and use the investible surplus differently.

    No Bharat it is not the timing (that was luck)it is the cost (0.8%, no longer available) and the top up (99% of that money got invested – not available now)…yes this was meant to show that there are no easy answers in personal finance :)

  11. Hi Subra,

    This blog is a shocker for me. I thought i built my portfolio with lot of thought and educated guess. I have term policy and invest in equity MFs for long term….since i did not believe ULIPs work…..i still need a lot to learn. Thanks for this article, i will start doing research on ULIPs now….thanks a ton.

  12. thank you! i should confess , i come to know about ‘top up’today only, and still not knowing more about it. as i have no money for ulip now or ever, but through shri a.n. shanbag’s ‘wonderland of investment’, i was clear in 1986 or so, that the life insurance policy by lic at that time was not affordable to me, the needy but not financially sound, and was not required (as neccessity) for the wealty for whom it is affordable! thanks to new govt. policy, which allowed private insurers , and term insurance!i took my first life insurance policy (term insurance) for 5 lacs at age of 55 years from hdfc standard even with extra load of premium by@20%! and that i discontinued at 61 yrs, as i stopped earning (it could continue upto 66 yrs) out of neccessity of cutting cost!

  13. again a fantantastic piece of work subra..but i have one doubt that why you miss your premium at 2007..i believe whether market is at 20000 or 40000 or 100000 or 1000 one should not time it and systematically follow the rules of equity investment.

  14. 2007 did not miss the premium, missed the top up…again will not top up going forward.

    this post is to show that ulip can be made good for the customer ,…it IS ABOUT KNOWLEDGE, not just charges.

  15. one reader and a fellow blogger has sent me the working of top 200, and i think top 200 has beaten the ulip..but by a small margin. need to do some calculations before i comment, but looks like top 200 is a lil ahead, but not by much. nowhere near what most readers think is the gap between a ul and a mf…

  16. i think , whether to choose top 200 or hdfc standard ulip is matter of choice, but the moot point is the expense ratio for mutual fund allowed is upto 2% or so, whereas the same seems 0.8% for the ulips. and that affects the return in long run.

  17. Sanjeev Bhatia CFP on October 9th, 2010 at 12:38 pm

    Subra/Fellow readers,

    I have always found that in MF Vs ULIP saga, almost all the time we are concentrating on “Returns/Expenses” only. Although this is the most crucial factor, there are other factors, equally crucial, which we tend to overlook. My objection to ULIPs are based on other possibilites:-

    1. In MFs, in case your fund manager underperforms, you can switch over to other funds without any financial loss. In Ulips, you are stuck with same fund manager and ULIPs being too much front loaded doesnot help matters either. Also, in case you want to switch to another ULIP, you have to pay the initial charges again and higher mortality charges too. Those who think a good Insurance company’s ALL Ulips are performing are sadly mistaken. Even your favourite HDFC has schemes which have not performed well. There are still people whose Fund Valve has net reached even the amount of total premium paid till date. So it is much better to keep control of your money in your hands.

    This is the most detrimental part of ULIPs.

    2. People don’t know how to take advantage pf switching option that is one of the best parts of ULIPs.

    3. It is not easy to structure your insurance needs thru ULIP. I think this can be done better thru term plans. Since longer term plans have higher premiums, it is easier to have term plans running concurrently of different durations based on your life goals. Say I have liabilites of 10 Lac for kids edu within next 10 yrs, their marriage(15 yrs), retirement fund for self and spouse(25 yrs), it is better to have term plans of 10, 20 and 30 yr durations and let them lapse as your liabilities decrease, thus reducing insurance EXPENSE further (For me, insurance is an expense, not an investment). Frankly, I don’t feel one has any insurance needs except spouse survival fund once your kids are educated, married and settled. Why have insurance at that stage?

    4. You were lucky also that you rode the best part of Equity boom India has ever seen and also due to the fact that you made liberal use of top up facility. Those who were not that fortunate have entirely different story to tell. Since you had more funds at disposal at right time, your fund value swelled and brougt your mortality(risk) charges to zero. THOSE WHO COULDNOT TOP UP WOULD STILL BE PAYING THESE AT MUCH HIGHER RATES NOW.

    5. Ulips ensure that you are horribly underinsured. Everybody does not have that premium paying capacity and it so happens those who require 40 Lac SA have to be content with 2-3 Lac SA. Swaroop committee points out that average sum assured per person in India is princely Sum of 93000/-. Great. Just tell the survivors of a family whose only bread earner has unfortunately died they are going to get this sum and ask them to survive.

    6. In any case, new ulip norms have mandatory insurance clause even for top-ups, so that advantage is gone.

    Ulips, I believe, can be good only for those fellows who don’t have any disciplione in life and can’t be counted upon to keep up their SIPs. For such fellows, ULIPs are the ONLY solution since they will somehow manage to pay premiums for their “INSURANCE”.

    Regret such long comment but I think it was necessary to bring more things in perspective. Would luv to have your and other fellow readers views on this.

  18. Sanjeev Bhatia, your views are thoughful and very well put.

    Thanks

  19. Good Points by Sanjeev.

    It also amazes me that lot of my close friends from IT industry also buy ULIP without actually understanding the product due to rampant mis-selling. One of my friend had bought a Bajaj Allianz policy with 70% allocation Charges in first year. When she knew about it she was upset.

    Even my fiancée has commitments in ULIPS and Traditional Endowment plans worth 64K per year. This was done on advice of her family and even I could not have say on that. When I showed her that the LIC endowment policy has returns less than a PPF she as least got a fair picture and
    would let me manage he finances from now.

    For people of old generations like my in laws and my parents the only investments tools they can think of is FD and Traditional LIC policy.
    When I got my job a lot of LIC agents who were friends of my dad started bugging me to take a LIC policy. I had a hard time time to convince them that i was not interested in that.

    Fortunately for me I had stayed away from ULIP’s and other plans . Would buy a cheapest term policy and invest rest in MF and PPF.

  20. Great perspective Sanjeev.One swallow does not make a summer!

  21. Let me reply to Sanjeev’s mail point by point.

    1. Thanks to a few common friends have done 10 year + SIPs in Hdfc, Templeton and a few SIPs in I pru. All have consistently been in the top 10% of the performers, so our groups ability to pick the winners in the past gives me a great pleasure. No arguments about Hdfc having non performing schemes, I have not worried about a couple of quarters – my returns have topped 25%, and am thrilled. Have a UL also from hdfc slic, topped up, no regrets ala subra.

    2. Switching means my financial planner KNOWS MARKET timing, sorry have not met ANY FP who can do it. Even the course content does not inspire me to trust my FP to do it for me. In fact I do not know anybody who knows anybody who can do market timing. So this is not a great feature. I am happy with a 100% equity allocation through out. Happy at that.

    3. I have only Hdfc slic term insurance which allows me to drop parts of it whenever I want. Had about Rs. 100 Lakhs, have reduced it by Rs. 10L…same policy reduced premium continues. Better than 3 policies I guess.

    4. Timing and luck..well we were all investing through out from the 1980s, 1990s, 2000s. Lucky? Well, not sure I have also topped up DEPENDING on my cash flows. Frankly I do not think it is about luck. Like Subra says it is about being in equities with all the money and keeping 5-7 years expenses in cash/ liquid / debt/ ppf schemes..

    I do not think the Indian public is ready for UL – it requires very responsible selling and buying. S and I have used some surplus funds to experiment and have fun rather than ‘create wealth’ that happens, sadly only with good stock picking. That requires effort and friends like R M…..

  22. Sanjeev Bhatia CFP on October 10th, 2010 at 1:03 pm

    Thanks Sarvana, Ajay and Vani, just trying to contribute my two cents.

    @ Asoke, Even I am no fan of market timing and even I don’t know anybody who knows anybody who can time markets.
    Switching was in the context of REBALANCING and NOT TIMING. In fact, since my comments were getting long, I HAD EDITED A LINE THAT SAID “NO BODY CAN TIME THE MARKET CONSISTENTLY.”

    “BETTER THAN 3 POLICIES” can be decided on studying the merits of complete situation and products. I believe it takes much more effort to properly formulate a risk coverage plan rather than just buying insurance, even term insurance. So would levae it at that…

    Agreed on being invested in equities througout & riding the booms. Luck is only in hindsight. Nobody knew in 2003 we are going to have such growth in equities for the next 5 yrs. Even in May 2009, for that matter. People who were “LUCKY” to have invested at that time have had tremendous returns.

    ULIP is much more than complex than people beleive it to be.

    I have always liked your comments and admire your intelligence. Keep up the good work.

  23. Though the technique you have used to get benefits out of this product is excellent and commendable still the title of the article “Ulips are good” is NOT at all true. One can not make it generic statement for sure. Take any product, even if it is worse somebody in the world can manipulate it wisely and makes the benefit out of it but that isn’t generic. Is it?
    If people are paying such a high charges(+commission) in ULIPs why would they again scratch their heads again and again to put their intelligent into it. Then what does the company do for them by charging them every year ?

  24. shashank kashettiwar on November 8th, 2010 at 10:48 pm

    Hi Sanjiv,

    I respect your intentions but Sanjiv your awareness about insurance products lacks a lot! We can blame or praise ULIPs for various reasons but kindly don’t blame them for all the wrong reasons!

    The ULIP promotion in a aggressive way was done by private insurers and espeacially by I-Pru advisers/agents. It is unfortunate that the majority of the advisors were selling it without utilising the excellent features it had to offer. Their signature ULIP product, ‘Life Time’ was simply amazing. If you knew about it and many other products; which were stopped in June’06, it would have totally changed your views about ULIPs and their utility.
    In your 5′th point you mention that ULIPs leave you horribly underinsured and one should opt for term plus other investments.
    Have you made these conclusions based on half baked information from agents and even employees of insuance companies? The plan like ‘life time’ was allowing a SA to premium multiplier of 150 at age 30 and 100 at age 40. Did you know that? For a reasonably low premium of 20,000 a 30 year old person could purchase a cover of 30 lakhs? For same cover 4 years back for 30 year tenure a 30 year old would have required a premium of @9,000 at least; even if lowest premiums in the market were thought of. What was allocation charge on this 20,000 ULIP premium- a mere 20% i.e. 4000 in first year and what was the mortality charge- roughly half of the level term premium i.e. @ 4600. The rest of your level premium could grow @ 15% on long term basis whereas the mortality charges are not growing more than 8% till age 60. In the subsequent years the allocation was 1500 and falling to 800 in 4′th year onwards! Now just compare these charges with your level term premium; which is an expense according to you! (Dear, you have not understood the significance of level premiums and increasing premiums even now and how the ULIP works or other tradional savings plans work). Forget about the ULIP beating the term+mf combo in long term, or even 3-4 years span. This product was beating it in very first year! And I have personally sold these kind of multipliers in a ULIP. So don’t blame the product if you don’t know about it. Yes, you can blame the people for misselling a fine product. But please don’t throw the baby alongwith the bathwater!
    (Here I don’t endorse the view of Subra for praising the ULIP. In my opinion he is doing it for the wrong reasons!)
    Sanjiv, when I talk about ULIP, I’m also thinking of equity as an asset class like you do. In the long term it hardly matters in which mutual funds or ULIP funds your portfolio is devided into. Because there is a ‘convergence principle’ at work. It brings the overall retunrn on your whole of the portfolio within a tight band of performance which would hug the sensex returns very closely. So does it really matter in long term how was our fund selection or market timing or any other stratety which one may think of to manage the whole of our portfolio? So thinking that I can shift from nonperforming ULIP fund hardly seems to a winning strategy as all strategies would ‘converge’ the long term returns to the asset class return i.e. the Sensex.
    You can think of insurance like an 1)expense 2) hedging mechanism or 3)asset. It requires really good understanding of the insurance concept and products to know all these perspectives. Your understanding is at the primary level only( otherwise you wouldn’t have thought of staggering those term plans and attached them to individual goal values! But more on it some other time)

    regards,
    shashank

  25. Hi all, I bought this ULIP endowment plan in 2008 with the monthly premium of 25,000 pm with tenure of 10 years . I know that three minimum premiums has to be paid but can anyone tell me when I can redeem my money with full advantage. please help as I need money in a shorter period.

  26. HDFC just launched a new product HDFC Pro Growth Flexi

    Here are the annual charges as explained by the sales guy
    7.5% Fund allocation charges (only first 2 years)
    1.9% Mortality charges (increase each year)
    0.45% Policy Admin charges (only kicks in the 6th year)

    After 5 years you can make the plan ‘Paid Up’ in 5 years which will cover you for the rest of the term

    I am taking a 50L home loan and thinking of taking this plan so that the loan amount is covered and the fund value could possibly help in pre-paying the loan say after 10 years or so?

    What do you guys think of this plan?

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