Indians are serious savers. We “SAVE” for our goals—college education, wedding, retirement, medical emergencies, etc. but we avoid “INVESTING” in long term instruments.
By nature, we are fearful investors. We fear the loss of capital and circumvent investing in the stock market. GUARANTEED returns resonate with our ideology. We prefer Recurring Deposits, Fixed Deposits, Public Provident Fund, NSCs, KVPs, and Insurance etc. to park our hard earned money.
Ironically, business-minded Insurance companies have always preyed on our fears of losing money. They launch products that offer GUARANTEED benefits, but ignore to highlight the meagre returns. Gullible investors fall for the smooth talk (sales pitch) without realising the lost opportunity cost.
Among the pool of countless complex insurance products, Bajaj Allianz Life Insurance Company has launched a new Unit Linked Insurance Plan (ULIP)—Life Principal Gain. According to the product brochure, the plan is a non-participating market linked plan ensuring capital protection. It guarantees loyalty additions on maturity.
Under this plan, an investor has the flexibility to choose:
- The premium and the premium payment frequency (annual or monthly);
- The policy term and
- The premium payment term
The Sum Assured is 10 times the annual premium. The net premium (after subtracting the allocation charge) will be invested in Balance Equity Fund and Builder Bond Fund, based upon the years to maturity. The company plans to rebalance your portfolio every policy anniversary.
Maturity Benefit
On maturity of the policy, you will receive higher:
- Fund Value (as on that date) (including guaranteed loyalty additions); or
- Guaranteed Maturity Benefits of 101% of the total premiums paid.
Death Benefit
In the case of policy holder’s death, during the policy period, higher of the following would be paid to the nominee:
- Sum Assured (i.e. 10 times the annual premium); or
- Fund Value; or
- Guaranteed Benefit of 105% of the total premiums paid till death
Guaranteed Loyalty Benefits
According to the policy brochure, if a policy holder has paid minimum of 5 years of premium, he will be eligible for Guaranteed Loyalty Benefits. For policy term up to 10 years, the guaranteed loyalty benefits would be 4% of annual premium, while for a policy term more than 10 years carries 15% of annual premium.
Surrender Value
If a policyholder surrenders the policy, during the lock-in period of 5 years, a surrender charge will be deducted from the Fund Value and the balance will be available for withdrawal after completion of the lock-in period. The life cover and the guaranteed maturity benefit cease the moment you surrender the policy. However, no surrender charge would be levied if the policy is surrendered after 5 years. In such a case, the Fund Value would be the surrender value.
Return
According to IRDA (Linked Insurance Products) Regulation, 2013 the current minimum guaranteed rate of investment return is 4% p.a.
Charges
Before you feel all these benefits come free, think again. The policy document highlights the following charges:
- Mortality Charges
- Fund Management Charge
- Policy Administration Charge
- Premium Allocation Charge
- Guaranteed Charge
- Miscellaneous Charge
- Discontinuance Surrender Charge
Our View:
At PersonalFN, we have always maintained that the principles of investment and insurance should not be commingled. We stood our ground even after the IRDA’s regulatory changes related to ULIPs in 2010. Every individual should purchase an adequate term insurance cover using the Human Life Value (HLV) method. Avoid purchasing any savings plans offered by insurance companies—the returns are poor. For long term goals, invest the premiums saved in a diversified equity mutual fund. Remember, financial planning ought to be dull and boring but it can be simple and easy—meet with a financial planner today.
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