Thursday, May 6, 2010


Of late, the lure of highest guaranteed net asset value is creating waves in our society. Insurance companies are vigorously publishing advertisement in support of such scheme. Though SEBI objected to such declaration but IRDA has permitted insurance company to continue with their plans. The existing ULIP subscribers need not worry unnecessarily on this count. The problems of ULIP would get resolved soon with the intervention of Finance Ministry.

The new set of unit-linked plans (Ulips) that guarantee highest net asset value (NAV) during the policy term is gaining popularity. These schemes look attractive since the downside arising from volatility in the market seems to be capped. These plans need to be demystified as soon as possible so that our readers can take informed decision. Ulips were among the favorite investment avenues for retail investors. However, the equity market crash in 2008 has shaken investors’ confidence in these products.

Recently, there have been many launches of insurance plans that offer "guaranteed highest NAV" during the term of the insurance plan. Here we demystify these products for your benefit, so that you can be better informed about how they work.

ULIPs are exposed to market ups and downs yet it cannot be considered as an investment product. It is truly an insurance product hence mortality charges and administration charge are required to be paid. The costs of insurance product have been brought down yet the cost of ULIP remains higher than mutual funds.

The Guaranteed ULIP or unit linked insurance plans are those where you buy a life insurance policy that comes clipped to an investment plan? Part of the premium you pay goes towards buying you protection on your life, and part of the premium goes towards buying “units” that invest in equity or debt instruments in the capital markets. These instruments are exposed to the randomness of the markets and prices can move around.

During the 2008-09 periods, the stock market went down about 60%, and then has gone up again. So, the price of the units, as measured in net asset value (NAV), can fluctuate a lot if based on equity planks. This is true for both ULIPs as well as Mutual fund.

To avoid such fluctuations the concept of Guaranteed NAV was introduced. But can this be really achieved?

Insurance companies operating in India have come up with a structured product to overcome this potential risk of loss of damage to one’s investment units in the ULIP. The Money is invested in the market instrument of equity. After it gains at least 10% OR more return, the product is canalized through Debt fund. These transformations ensure less volatility and protect erosion of return already earned. This system protects erosion of Value as the debt instruments do not fluctuate as much as the equity schemes do. This ensures protection but does not translate into the highest return. The highest NAV which client would get is that of Debt fund and not of equity fund. Many people may like it, because there is no certainty of getting very high return, rather it may give lowest return, at the time of maturity if product is based on equity plank. Suppose our readers buys an 8-year guaranteed ULIP in 2010 and the investment units are priced at Rs 10 NAV. The price of the underlying equity and debt instruments is volatile, so the NAV fluctuates wildly from being as high as Rs 21 to as low as Rs 10 a unit.

The client will get maturity proceeds at the price of Rs 21, even though the NAV has dropped to Rs 10 at maturity. This is the “guaranteed” feature of this product – whatever the price at maturity; the policyholder is guaranteed the highest price during the term of the product. At maturity, you will receive the higher of the fund value or the guaranteed value of your units. To achieve that most of your money would be kept in Debt fund hence return would be lower compared non guaranteed ULIP. In guaranteed Ulip you would not lose but would never get very high return.

The Most of the plans are for an 8-10 year term and in most plans you need to pay a premium for at least 3 years, however there is the feature where you can pay a single premium as well. But if you take out before four years you need to pay some kind of fine. So don’t invest in ULIP if you cannot spare money for very long term.

In the unfortunate scenario where a person dies before the maturity of the policy, the guaranteed NAV would not be applicable. Your beneficiary will get the sum assured by the policy, and some products might also give you your fund value at the time of your death

.ULIPs might be good products for someone who wants to buy insurance cum investment plan for the long-term. If you are looking for a ULIP and are worried about market fluctuations and losing your capital, then it might be worth reviewing these guaranteed ULIP products. In this product you cannot dictate where to invest your money. That would be the responsibility of the fund manager for he needs to protect your money invested. In guaranteed ULIP you may not loose money but would not also get best return as in case of general non guaranteed ULIP or diversified Mutual fund.

However, it is unlikely that these are the best substitute for equity mutual funds. So, please be clear whether you are buying guaranteed product as an insurance policy or as an investment product, you would not lose capital and would get moderate return. If you are risk averse then buy guaranteed ULIP. Otherwise go for non guaranteed ULIP or diversified Mutual fund with better return in the long run.


1 comment:

Sunil Rao said...

Appreciate for sharing this helpful information, to know more visit: ULIP NAV