LIFE insurance companies are busy launching new versions of unit linked insurance plans (Ulips) that would meet the new guidelines laid out by the Insurance Regulatory and Development Authority (Irda) of India. SBI Life Insurance, a life insurance company promoted by State Bank of India, has also joined the melee with two new products: Smart Performer and Unit Plus Super.
Here we will examine the Smart Performer, which aims to offer the highest Net Asset Value (NAV) during the first seven years or the NAV on Maturity, whichever is higher.
Concept Of Highest NAV
Just like Ulip products, the concept of the highest NAV has really captured the imagination of customers, especially those who want the best of both worlds. That is, they don't want to take risk but want the highest possible returns. No wonder, most of them have wrong notions about the concept — many believe the highest NAV would capture the highest level in the stock market during the period of investment. The highest NAV-guaranteed products achieve the feat by shifting a portion of their holdings in equity as the price goes up to debt instruments with appropriate maturity. The exercise helps the insurer to lock-in their profits.
The Product
Smart Performer, a NAV-guaranteed Ulip product, offers policyholder 5% higher return than the highest NAV. The policyholder has two investment options to choose, depending on his risk appetite: Secure Plan and Secure and Grow Plan.
Under Secure Plan, the entire premium (net of allocation charges), is invested in the 'Daily Protect Fund'. The policyholder will get a return based on the performance of this fund and the underlying guarantee.
Under the Secure 'N' Grow Plan, 80% of the entire premium (net of allocation charges) will be allocated to the Daily Protect Fund and the remaining 20% will be allocated to the Index Fund, which will invest in the stock market. This fund closely tracks the Nifty Index.
Secure and Growth plan uses several investment strategies such as automatic-rebalancing mechanism. If the scheme gains more than 15% from the equity component, the extra profit is automatically transferred from the Index Fund to the Daily Protect Fund. Using CPPI, the asset allocation under Daily Protection Fund is dynamically rebalanced to provide a guarantee of 105% of the highest NAV. On the insurance front, you have the option to increase or decrease the sum assured amount depending on your insurance requirement.
The Cost Structure
The premium allocation charges are 8.5% in the first year and 6% for the next four years. There is also a guarantee charge of 0.5% p.a, over and above this. Policy administration charges, mortality charges, fund management charges are over and above these. For a 10-year product, the charges are high. The returns will be similar to a debt fund. The guarantee they offer is applicable only if the policy is in force for the entire tenure.
How Long Should You Stay Invested?
You should invest in this product only if you are ready to complete the full term of the policy. Ulip cost structures are such that they start working to your benefit only after eight years of investing because of deductions on account of premium allocation charges and some other charges. The deduction is generally higher in the first few years. If you anticipate some liquidity need within the next few years, mutual funds are a better investment vehicle for you. They are more cost effective and you also have the flexibility to get out from them whenever you want.
