Insurer Promises A Guaranteed Return Of 275% Of The First Year Premium, But An FD Will Earn More In Similar Period
KOTAK Smart Advantage plan is a ULIP plan launched by Kotak Life Insurance. The unique selling points of the plan is the insurer promises a guaranteed return of up to 275% of the first year premium.
HOW DOES THE 275% RETURN WORK?
As per the policy wordings, the first year's premium does not get allocated to your fund. Instead, it will contribute towards the fixed return, which you earn at maturity. This fixed return could be from 100% for premium payment term of less than 10 years to up to 275% for 30 years. The premium payment terms are 3, 5, 10, 15, 20, 25 or 30 years for this plan.
The plan rewards customers with long-term commitment as shorter premium payment tenure would reduce your fixed return. Financially disciplined customers would be rewarded with this guarantee. If you miss out on the premium payments, the fixed return would be reduced proportionally as mentioned in the policy document.
IS THE RETURN GOOD ENOUGH?
You easily earn more than 300% by investing this money in an FD for 30 years against 275% of the first year premium, which is the guaranteed element of this plan. The assumption here is the post-tax rate on a FD would be around 5-5.5%. The absolute return at maturity would be like any other ULIP plan, depending upon the performance of the fund. If you are planning to stay long in this ULIP, say up to 30 years, it could be a viable option.
DIFFERENT OPTIONS
This plan gives you an option to invest in three funds depending upon your risk appetite. The opportunities fund, which targets an aggressive investor, would have 75-100% exposure in equities/stocks. The dynamic floor fund, which targets cautious investors, would have 0-75% exposure in equities. The conservative investor can opt for a dynamic bond fund with 100% exposure in debt-related instruments.
PREMATURE WITHDRAWAL & SETTLEMENT
The ULIPs allows partial withdrawal after the third year. If you withdraw more than 10% of the fund value, it affects your fixed return at maturity. Either at maturity or in case of the death of the policyholder, the plan gives the option of lump sum settlement or an equal instalment over a period of up to five years. The equal instalment option is a good one, especially if the market is bearish at the time of the policyholder's death.
CHARGE STRUCTURE
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The cost structure of this plan is comparable to any other ULIP. The fund management charges are between 1.2% and 2.0% of the fund value, depending on the type of the fund. The administrative charges work to Rs 780 per year. The mortality charges also differ depending upon the age of the policyholder. The surrender charges are applicable only if the policy gets surrendered within eight years. These charges fall in the range of 5-1%. The first four switches in a year are free. For every additional switch thereafter, Rs 500 will be charged.
ADDITIONAL BENEFITS AND FEATURES
Loyalty bonuses are provided every five years after the tenth year.
WHY INVEST:
The family gets an income stream for five years in case of a policy holder's death if they opt for equal instalment stream. This can be useful if the stock market has been bearish.
WHY NOT INVEST:
It's like another ULIP, which is subjected to vagaries of the stock market. Don't read too much into the guaranteed return.
