Better returns from new ULIPs

The insurance regulator, Irda, have given a more customer-friendly avatar to the unit-linked insurance plans, or, ULIPs. One of the major reforms in the guidelines was the introduction of cap on charges and commissions that could not be front-loaded and had to be evenly distributed throughout the policy term. Also, the regulator mandated a higher death benefit and a longer lock-in period.

As a result, compared to the old Ulips, the new ones provide better avenues for wealth creation along with adequate cover. With reduced cost structure, there is more that gets invested and therefore makes a significant difference to the returns earned in the long term.

The upfront charges are now uniformly distributed over the five year lock-in period. So, a good portion of the first year premium will be invested and your money starts to grow from day one.

Also, the maximum reduction in yield at maturity, that is, the difference between the gross yield and the net yield has been capped at 3% for policies whose tenure is less than or equal to 10 years, whereas, for plans whose tenure exceed 10 years, the total charges can't exceed 2.25%. This means, the IRR, or, internal rate of return cannot be less than 7.75% in any case.

The lock-in period has increased from 3 years to 5 years which ensures that these policies have long-term orientations and enjoy greater compounding benefits—higher the returns the more your earnings get re-invested.

Insurers have launched plans with lower charges than the cap. In fact, there are online ULIPs in the market where you do not have to pay any commission. So the whole money gets invested and you are able to get higher compounding benefits.

They have also become more flexible offering different cover sizes and premium paying terms. Also, there are more fund options to cater to different risk appetites along with top-up options to invest additional premiums. A few insurers are also offering unlimited number of partial withdrawals and higher death benefit as much as up to 40 times the yearly premium.

Being essentially an insurance product, they haven’t lost their core component either. A requirement of minimum sum assured should now be at least ten-times the yearly premium paid ensures they are provide adequate protection as well.