Variable life insurance plans are expensive with low-sum assured. Even returns are not as rewarding as Ulips as they invest in fixed income instruments
LAUNCHED in July 2009, variable life insurance plans (erstwhile universal life insurance plan) have, of late, gained popularity due to its greater flexibility to change the mortality and savings proportions and transparency. But are they really worth investing? Variable life insurance plan combines investment and insurance similar to unit-linked insurance plans (Ulips). However, the returns are declared by insurance companies on a yearly basis and not linked to the stock market. One part of the premium goes to buy life insurance and another is invested in bonds or equities. The death benefit and savings element can be reviewed and altered as the policyholder's circumstances change but as per the guidelines of Irda, the premium amount cannot be altered in the course of the policy.
For instance, if you prefer insurance protection to growth, you can increase your insurance protection and decrease the saving component. But if insurance needs are diminished due to reasons such as reduced financial burden or responsibilities, more premium can be directed towards investment. Max New York Life Insurance, Reliance Life Insurance and Bharti AXA Life Insurance are some of the companies that offer such insurance plans.
There are two types of variable life insurance plan — participating and nonparticipating. While participating offers guaranteed return, non-participating offers yearly bonus at the end of each financial year in addition to guaranteed returns. The minimum sum assured is 50,000 or 10 times the annualised premium, whichever is higher for entry at the age below 45 years. Beyond that age, it is the higher amount of 50,000 or seven times the annualised premium.
Top-up premium is allowed throughout the term. However, if the insured decides to increase his contribution through a onetime top-up, the company can deduct at most 3% from the top-up by way of charges. The product also provides for loan up to 60% of the balance at a specific rate of interest. Another notable feature of this plan is that it does not get automatically cancelled even if the customer fails to pay the premiums. The underlying condition is that premiums paid till date should be sufficient enough to meet the policy requirements till then.
DRAWBACKS: One of the major disadvantages of this form of life insurance is the high cost of premiums. As per the recent Irda guidelines, the maximum expenses are capped at 35% of the first-year premium.
For the second and third-year premiums, the cap is 7.5% and 5%, respectively on subsequent years. The plan offers less flexibility on three counts. It allows neither the alteration in the annual premium nor any sort of partial withdrawal. Further, no riders are allowed with the plan. These factors take away the main crux of variability from such variable insurance plans. Also, the guaranteed rate of return is not competent enough to factor for inflation.
VIP V/S ULIP: The structure of this product is somewhat similar to Ulips, but the benefits are variable. Similar to Ulips, you pay a premium and choose a sum assured, which is a multiple of the premium. A major portion of the premium goes out in premium allocation charges and the remaining is invested. Other costs include mortality and administration charges. However, VIPs are different from Ulips in terms of investment strategy. Since Ulips invest in the market, the net asset values can be monitored on a daily basis. So, at the end of each day, you would know your gains and losses. VIPs, on the other hand, invest primarily in debt products and their returns are dependant on the rate the insurer declares periodically. Due to these limitations, VIP is more like an endowment plan with higher transparency.
WHO SHOULD INVEST? Variable life insurance is expensive with lower sum assured. Since they invest in fixed income instruments, their returns are not as rewarding as Ulips. Variable life insurance gives you limited control on the policy and is no more as variable and flexible as it is understood to be. Due to their relatively better transparency and flexibility, VIPs are better for the risk averse investors who are interested in traditional products.
These plans are ideal for those who anticipates changing insurance needs at different stages of life but do not want to keep switching policies. However, for those who want better returns may go for other options like Ulips or a term plan along with mutual fund or public provident fund (PPF).
