THE capping of charge structure on Ulips gave rise to a new genre of products among life insurance companies called the Universal Life Insurance Plans (ULPs). Universal life insurance policies like Ulips are hybrid products which combine investment and insurance.
HOW DO THEY WORK?
Many insurers such as Aviva Life Insurance, Max New York Life Insurance (MNYL), Reliance Life Insurance etc have their own Ulips on offer. The investment component of the plan earns interest. One of the main differences between Ulips and ULPs are that the returns in the former are linked to equities whereas the latter offer returns linked to fixed income/debt products.
Although it works like a traditional plan, it's a step forward from the endowment products due to transparency and flexibility. Most traditional products do not make any disclosures about their cost structures or their investment plans. The policyholders just make premium payments in anticipation of some returns in future. However, ULPs give a fair idea about their investment pattern and loyalty bonuses in advance. Similarly, the plan assures a minimum guaranteed interest credit at 3.5% per annum.
MNYL under its ULP called Secure Dreams offers loyalty additions at 10% of the annual premium, which would be credited on each of the last five policy anniversaries provided the policy is in force and all due premiums have been paid. Second, most traditional plans do not offer flexibility in premium payments. The frequency of payment is usually pre-fixed and the policyholder has to stick to the schedule. However, under ULPs, a policyholder can pay at any point of time during the year subject to some limits.
Also, unlike traditional plans, policy holders are allowed to make partial withdrawals after three years. However, as the policy holder ages, a higher portion of the premium amount flows into insurance. In fact, if the policy holder is unable to pay the premium, it's often funded from the fund itself to avoid the policy from lapsing.
DISADVANTAGES
These products have a high cost structure like Ulips. The charges for Aviva Dhan Sanchay are 15-20% for the first year, 7.5% for the second and third year and 5% from fourth policy year onwards. The policy administration charge is 20 per month.
But Ulips, however, try to offset the high cost by offering at-tractive returns since they are linked to equity. However, since ULPs largely invest in debt instruments such as government securities or corporate bonds, it's not a rewarding proposition for customers. Also, the sum assured is very low despite paying higher premiums.
WHY GO FOR IT:
If you are a risk-averse investor, you can look at these products which are better than traditional products due to transparency and flexibility
WHAT IS THE CATCH:
These products are expensive with low sum assured. Even returns are not as rewarding as Ulips as they invest in fixed income instruments
