Unit-linked Insurance Plans (Ulips) are back. Insurance companies are busy unveiling new versions of the products which had earned a bad name for the entire industry in their earlier avatar due to rampant mis-selling. According to financial experts, the new Ulips, which meet the latest guidelines issued by the Insurance Regulatory and Development Authority (Irda), are definitely more transparent and investor-friendly.

For example, the charges are now evenly spread across the tenure of the policy, there is a longer lock-in period and surrender charges are capped. But is the new version a better product now or is it just old wine in a new bottle? "The new guidelines lay great stress on promoting Ulips, primarily as insurance products. The insurance component in the new Ulip will be significantly higher than earlier. Further, higher initial allocation could result in better returns," says G Murlidhar, chief operating officer, Kotak Life Insurance.

Evenly spread allocation charges, or the insurer's fee for managing a policyholder's money, through the policy term will enable the customer to see a gradual build-up of his funds over time, encouraging him to pay premiums regularly and staying invested for the entire duration of the policy, he adds.

Three is five now

Yes, this is one change you will notice immediately. Earlier, the insurance advisor use to lure innocent investors by asking him to pay the premium only for three years to reap a windfall at maturity. That is going to change as the new Irda guidelines stipulate a minimum lock-in of five years for Ulips.

"Under the new charge structure, the insurer earns the bulk of charges within five years as there is no year-on-year cap on charges. Even if the policy permits an early exit, you will see significant erosion in capital," says Suresh Sadagopan, principal financial planner, Ladder 7 Financial Advisories.

Rationalisation of charges

However, some of the new guidelines will delight Ulip fans. The rationalisation of charges in Ulips has made them a slightly better option for people who view them as the most convenient way of buying life cover with an investment element.

"Evenly spread charges, allocation of a higher portion of premium towards the investment component, and increase of lock-in period to five years will enable the customer to reap better returns from new Ulips. Cap on premature surrender penalty will ensure greater liquidity for the customer and reduce his loss even if he surrenders early," says Murlidhar.

The cap on surrender charges is something Ulip holders will welcome. Irda has introduced a cap on surrender charge, now termed as policy discontinuance charge, if the policy is discontinued within the first five years. This charge is based on the year the policy was discontinued and the annual premium. Now, life insurers can charge only a small penalty on early surrender of policies. During the first five years, the life insurer is also required to pay 3.5% interest on the account value of the discontinued policy.

"Insurance companies will have to ensure that the product is sold as a long-term financial tool and the features of the product are appropriately communicated so that the policyholders remain invested till the end of the policy term and do not exercise the early surrender option," says V Viswanand, director and head, products & persistency, Max New York Life Insurance.

Higher insurance cover

Ulips' earlier avatar drew the ire of investment experts, mainly because insurance companies used to design these products with very little insurance element in it. Since the new norms have plugged the loophole, agents will now find it a bit hard to sell Ulips as pure investment products because of the enhanced insurance cover.

"The insurance component in new Ulips will be significantly higher. Hence, these products will carry a higher mortality charge," says Murlidhar.

Ulips or Mutual Funds?

Of course, greedy sales persons will still target you, but if you know what a Ulip stands for you, then you can successfully ward off their advances. Here is the low down: Ulips are primarily (at least they are meant to be) insurance products that offer disparate investment options. In this sense, you can say they are insurance-cum-mutual funds.

"Ulips are a protection and long-term savings tool. They provide for disciplined savings with the opportunity to take part in fund options ranging from debt to balanced and complete equity," says Viswanand, "They are long-term instruments and should be bought with a specific life stage goal in mind. A savings horizon of 10 years and more is ideal for life insurance products including Ulips," he adds.

Simply put, go for Ulips only if you want to mix your insurance cover with an investment goal. But saving up for your retirement, your child's education and marriage and so on can be done by putting in money in a "pure" investment vehicle like a mutual fund scheme. And, of course, at the risk of sounding old-fashioned, we repeat that term plan is the smartest way to buy a life cover.

A combination of term cover and mutual fund can beat a Ulip any day (see next slide). "This product (Ulip) works similar to a mutual fund but an insurance company charges heavier fees through allocation, administration and mortality charges to name a few. This is because the insurer has to pay his agent," says Kartik Jhaveri, director, Transcend Consulting. "A customer is better off investing in a mutual fund as ultimately both the instruments invest in the equity market. Moreover, Ulips may offer attractive returns based on their NAVs. But the real rate of return is much lower, as the entire premium amount is not invested. Ideally, an investor should supplement his mutual fund investment with a simple term cover, which is the cheapest and purest form of insurance," Mr Jhaveri adds.

Unit-linked plans, or Ulips, offer returns almost on par with mutual fund and term insurance combination over the long term.

Option 1: Invest Rs 50,000 a year in a Ulip

Name of scheme: SBI Smart Performer

Age of insured: 30 years

Sum assured: Rs 10 lakh

Annual premium: Rs 50,000

Mortality Charges: Rs 1,116.77-1,063.36 (Year 1-5), Rs 1,037.08-109.61 (Year 6-15)

Corpus after 15 years: Rs 11,99,397

Invest Rs 50,000 a year in a Mutual fund +Term plan combo

Term plan: Aegon Religare Term Plan

Age of insured: 30 years

Sum assured: Rs 10 lakh

Annual Premium: Rs 1,500 for 8 years & Rs 750 thereafter

Amount to be invested in mutual fund: Rs 50,000

Corpus after 15 years: Rs 11,97,936

Source: ET Bureau