Guaranteed Returns ULIPs - Topping Up

If your pulse rate goes up when the market moves up and your pulse rate starts slowing down when the market plummets, then investing in equities is quite a risky proposition for you. Yet, you may still wish to put your money into equities to take advantage of the high returns which equities offer as compared to other asset classes. How you wish you could take the risk out of investing in equities and benefit from the attractive returns. Well, now your wish is about to be granted – you can go for the guaranteed returns ULIP products offered by some of the insurance companies. These products offer maturity value based on the highest net asset value (NAV) recorded during the policy term irrespective of the market conditions during the period. After Birla Sun Life Insurance launched Platinum Plus,, Tata AIG and SBI Life have also joined the fray and launched their own products. To understand how these policies work and whether there is any catch, let’s take a closer look at all three products.

The ULIP plans

 There are three guaranteed return ULIPs on offer in the market, viz. Birla Sun Life Insurance’s Platinum Plus II, Tata AIG’s Invest Assure APEX and SBI Life’s SMART ULIP. These ULIPs offer maturity value at the highest NAV reached during the policy period, with death benefit being the higher of the fund value or sum assured. Tata AIG Invest Assure: The plan offers 100 reset dates on 10th of every month, thereby  covering a period of 8 years and four months. It offers three riders – critical illness, accidental death benefit and accidental death and dismemberment.

Birla Sun Life Platinum Plus: The plan offers 88 reset dates on 15th of every month, thereby recording the highest NAV from seven years and 4 months. The plan doesn’t charge any fee for partial withdrawals and levies no surrender penalty after three years.

SBI Life Smart ULIP: The plan offers two reset dates in a month and a total of 168 reset dates on 8th and 23rd of each month. It also offers the facility of two premium payment terms – three and five years. The premium allocation charge is a bit higher in the five-year premium payment (PPT) term compared with the three-year PPT.

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How do the policies work?

 These ULIP policies work on the principle of paying the maturity amount based on the highest NAV generated dur-ing the first seven years of the policy. However, if the NAV on the date of maturity is higher than the highest recorded NAV, the final fund value is calculated based on the NAV on the date of maturity. To understand better how exactly the policy works, let’s take a closer look at SBI Life’s Smart ULIP. This policy’s tenure is divided into three phases, viz. subscription phase (lasting one year), NAV build-up phase and accumulation phase. The plan comes with a fixed policy term of 10 years. The policy premium collected from the policyholder is parked in two funds: parking fund (which is money market fund) and investment fund (which is FlexiProtect Fund). The premium is first put into the parking fund which invests in debt and money market instruments. Thereafter, the premium is transferred to the investment fund on the reset dates. Investment funds invest in equities (0 to 100 per cent), debt and money market instruments. The NAV of the scheme on specified number of reset dates serve as record dates.

At the end of the policy tenure, the units are redeemed based on the highest NAV recorded on the reset dates. Although the policy term is 10 years, NAVs are recorded only for a set number of reset dates. The plan has two reset dates — 8th and 23rd of each month. So, for example, if you pay Rs 50,000 on June 2 as premium for SBI Life Smart ULIP, the company will park your money in the money market fund on June 2. Later, on June 8, it will transfer the money to its Flexi Protect fund. The base unit per NAV is 10 for all plans. Thereafter, the company will record the NAVs on 8th and 23rd of every month for the next seven years. The highest NAV recorded on any of the reset dates will be taken as the minimum NAV on which fund value will be calculated. While SBI Life’s Smart ULIP has 168 fortnightly reset dates,  Birla Sun Life Insurance’s Platinum Plus and Tata AIG’s Invest Assure APEX have 100 and 88 monthly reset dates respectively (see box)

 On maturity, instead of taking the maturity amount as a lump sum, policyholders can take the money in instalments over a period of five years. The option of withdrawing maturity amount in instalments could be useful during a bear phase at the time of maturity because investors can remain invested to ride on the upside of equity. However, it must be noted that during the settlement period (of withdrawing maturity amount in instalments), the company will neither provide any life cover nor any guarantee on NAV, but it will continue to deduct policy administration and fund management charge. In case of surrender before maturity, the policyholder gets an amount equal to the number of units in the account multiplied by the prevailing NAV on the date of surrender.

Past performance

Since these are new schemes, no historical data is available on these ULIPs. Hence, it is difficult to say how these will perform over a period of ten years. Of course, on can assume that over a long term of 10 years, these schemes would be able to provide decent returns with the added advantage of life insurance.

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Are these right for you?

These plans are a good bet for investors who are risk averse and still want to have decent returns on their investment. Also, investors who have the patience to stick to the plan for a period of 10 years will only be able enjoy the benefit of the highest recorded NAV. That apart, the NAV of the investment fund is not taken into account on a daily basis but only on a fortnightly or monthly basis. Hence, the highest NAV of the investment fund may not necessarily come about on the reset dates, in which case the investor may not necessarily enjoy the full benefit of the market upside.  However, since the investor is paid the maturity amount at the highest NAV recorded on any of the reset dates, it is still offers a good option to lock in the benefits of market rally that may happen during the course of the first seven years of the policy term.

That apart, these ULIP plans don’t have a switching option and have only one choice of fund that invests in a mix of debt and equity. Hence, an investor is dependent on the expertise of the fund manager who manages the fund as his money is locked up in the single fund while on the other, he does not have the option to switch over to another fund if the fund manager is not performing. Lastly, since the minimum premium is quite high (Rs 50,000 to Rs 1 lakh per annum), these plans are more suited for upper middle class or high net worth individuals.