Skip to main content

How good are Universal Life Policies (ULPs)?

Most of us at some point or the other have found ourselves in a tight spot where despite knowing the importance of paying premiums regularly for covering our lives against eventualities, we have deliberately skipped payment for want of funds. Though the option of reviving a lapsed life insurance policy exists, the process can be tedious and time consuming, and can also result in monetary loss.

 

At that point of time, you would have probably wished that your insurer offered the flexibility of paying the premium for your life cover according to your convenience: pay the premium when you have the funds and skip payment if there is a dearth, without the fear of your policy lapsing.

To address this issue, insurance companies have devised policies, called universal life policies (ULPs), which not only offer flexibility of paying premium according to one's convenience but also allow one to alter the premium amount and the death benefit.

 

What are ULPs?


A universal life policy is a hybrid product that blends the features of both traditional plans and of unit-linked insurance policies (ULIPs). Like traditional plans they offer guaranteed returns. They are also somewhat like ULIPs in the sense that they are transparent about declaring charges and the rate of return earned by your investment corpus.

 

Universal life policies actually are as simple as maintaining a personal savings account with the added advantage of a life cover.

 

In a universal life plan, the premium over and above the insurance (or mortality) charge, commission and expenses goes into a cash or savings account on which the insurer pays a guaranteed rate of interest. This rate of interest is declared at the beginning of a pre-identified period (monthly/half-yearly/quarterly). In case a person stops paying premium, the cash balance is used to meet the expenses associated with providing death cover. Hence the policy continues as long as the cash balance lasts.

 

Key features


Flexibility of paying premiums. This is the product's USP. In a ULP, the policyholder has the freedom to change the frequency of premium payment over the policy's life. One can pay the premium when one has the money and skip payment in case of shortage of funds.

 

Adjustable death benefits. In a universal plan, the policy holder also has the flexibility to alter the premium amount and hence the death benefit throughout the policy term. This kind of product is particularly suitable for people whose income flow is irregular or seasonal. In its recent draft guidelines, the Insurance Regulatory and Development Authority (IRDA) has proposed that at the age of 65 the policyholder should be given the option to alter the sum assured. Risk premium should be levied from the policy holder only with his prior written consent.

 

Lapse protection. Universal life policies offer freedom from the fear of policy lapsation in case the policy holder fails to pay a couple of premiums. As mentioned earlier, the balance in the cash account takes care of the policy cover expenses when one fails to pay the premium, thereby preventing the policy from lapsing.

 

Cash withdrawals. Universal life plans give investors the opportunity to make partial withdrawals from the account balance generated over the policy term. However, insurance companies have a limit on the number of free withdrawals that can be made during a policy year. Withdrawals beyond that incur a charge.

Guaranteed returns. Another benefit this product offers is guaranteed return on the account balance. Till now the guaranteed rate was declared at the beginning of a pre-defined period, for example a quarter. However, IRDA has proposed that the rate should be declared at the beginning of each financial year. "The guaranteed interest rate shall be paid on the annual premium irrespective of the mode of premium payment," it says.

 

Key concerns


Flexibility to alter insurance cover. Surprisingly, this is one feature that insurance companies are using as a USP of the product to push sales. However, financial planners believe it could work as a double-edged knife. They feel giving small and not so well-informed investors the flexibility to decide their death benefit could lead to under-insurance. Small investors often do not have the knowledge to know exactly how much life cover they need. If they are given the freedom to alter their life cover and investments, they may end up taking wrong decisions.

 

Neither here nor there. Financial planners also feel that these products neither provide enough life cover nor generate the kind of wealth one may need in future. The guaranteed returns are low - about 3.5 per cent per annum - and the minimum life cover is 10 times the yearly premium. These products are a notch better than traditional plans, but we still feel linked plans (ULIPs) are better for wealth creation.

 

High expenses. IRDA's recent decision to issue guidelines on ULPs was borne out of the need to rein in the high commissions being paid to distributors. Financial planners feel there are better products available in the market that have lower costs. The priority of these products is to enable distributors to earn high commissions. Any product that has distributors' interests as its first priority cannot be good for investors.  we still feel a combination of term plan and mutual funds is a far better and cheaper option.

 

Though universal life plans are an improvement over traditional plans in terms of transparency and flexibility, they do not give you adequate life cover, nor will they enable you to build the kind of corpus that will help you meet your future financial needs. The consensus among financial planners is that a combination of term plans and mutual funds will meet investors' needs better.

It will be interesting, though, to see what sort of guidelines on ULPs the insurance regulator comes up with. Already, however, some within the insurance industry have begun writing this product's obituary. ULIPs managed to stage a comeback after the overhaul in rules governing them, but I don't see ULPs recovering from here.

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

EPFO can pay 8.5% interest in 2009-10

THE Employees’ Provident Fund Organisation can comfortably offer 8.5% interest rate to its 4.41 crore depositors during 2009-10 and still record a surplus contrary to Rs 139-crore losses suffered by it for giving the same benefit during the current fiscal. The issue of return to the depositors would be discussed at a meeting of the ‘finance and investment committee’ (FIC) on Thursday, agenda for which lists that maintaining an 8.5% interest could still give the fund a surplus of Rs 6.4 crore on the investment made by the fund. If EPFO maintains the interest rate of 8.5% on PF deposits, there will be a surplus of Rs 6.4 crore at an estimated income of Rs 12,994 crore in 2009-10. In case the interest is raised to 8.75%, the fund would suffer a loss of Rs 366.77 crore and the deficit would be still higher at Rs 739.94 crore if the rate of interest is fixed at 9%. FIC gives recommendations on financial matters to the apex EPFO body Central Board of Trustees (CBT), which takes the final ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now