I must confess that the article headline is a click-bait. This is not a post to review the ICICI Prudential Signature Unit Linked Insurance plan. I have picked up this plan because it is a new low-cost product from ICICI Prudential Life. The intent is to address a much bigger topic about ULIP charges. In an earlier post, I had discussed the impact of ULIP charges on returns but had stopped short of quantifying the impact. More importantly, I had not touched upon how you can easily assess the impact of charges on returns and compare cost structures of various ULIPs.
In this post, let’s take a different approach to assess the ULIP cost. IRDA mandates that insurers share illustrations in product brochures for gross returns of 4% and 8% p.a. In this post, let’s look at how much these charges eat into your returns. We will see how returns of a ULIP are compromised because of the charges.
I will begin with the ICICI Prudential Signature ULIP and then extend the analysis to other popular ULIP products.
ICICI Pru Signature ULIP: Review and the Cost Impact
ICICI Pru Signature ULIP is a Type-I ULIP. In the event of the demise of the policyholder, the nominee will get the higher of Sum Assured and Fund Value. This is a fine choice since the company wants to project this primarily as an investment product. The adverse impact of mortality charges on the return goes down substantially.
I copy the data from an illustration given in the ICICI Pru Signature ULIP.
A 35-year-old person invests in this plan. Sum Assured is Rs 10 lacs. The policy term is 15 years. He needs to pay an annual premium of Rs 1 lac for only 5 years. He will get maturity amount after 15 years. IRDA requires insurers to provide illustrations for gross returns of 4% and 8% p.a. (the actual gross returns can be very different).
At 8% p.a. of gross returns, your maturity amount will be Rs 11.47 lacs. That is an IRR of 6.57% p.a.
If you had made the same investment in a pure investment product that yielded 8% p.a., you would have ended up with Rs 13.67 lacs.
This is a difference of Rs 2.2 lacs.
Where did the Rs 2.2 lacs go? How did gross return of 8% become net return of 6.57%?
In this ULIP, the charges eat your Rs 2.2 lacs.
ICICI Pru Signature ULIP has four charges.
- Premium Allocation Charge: NIL
- Policy Administration Charges: Rs 100 per month (recovered through the redemption of units). These charges are applicable throughout the policy term. Under this ULIP, these charges will be added back to your fund value at the time of maturity. However, you still lose out on the compounding benefit on these charges. GST paid on these charges will also not be refunded.
- Mortality charges: This goes towards providing you the life cover. Mortality charges are recovered through the cancellation of units. Since ICICI Pru Signature is a Type I ULIP, the impact of these charges is likely to be low (as compared to a Type II ULIP). The mortality charges will be refunded too
- Fund Management Charges (FMC): This charge is adjusted within the NAV. For most of the ICICI Signature ULIP fund, the charge is 1.35% p.a.
Because of these charges, you lost Rs 2.2 lacs. Or the gross yield of 8% p.a. became 6.57% p.a.
Loss of 1.43% p.a.
1.35% p.a. can be attributed to the FMC while the remaining is because of mortality charges and the Policy Administration charges.
Do note that the gap will be smaller for 25-year-old and larger for a 45-year-old. This is because of the impact of mortality charges. The premium is quite high and the impact of fixed charges such as the policy administration charges is low because of this. For a lower annual premium, the impact would have been higher.
Is ICICI Pru Signature ULIP that bad?
Well, there is a catch.
8% gross return vs 8% net return
It is unfair to compare 8% gross return in a ULIP with an 8% net return in a pure investment product.
If you are investing in PPF, EPF or direct equities, you can think of gross return and net return to be equal. By the way, even direct equity investments will have some charges in the form of brokerage, etc.
For other investments such as mutual funds, there will be costs involved. For instance, even mutual funds have explicit expense ratios. Mutual funds also charge fund management charges.
Therefore, if a mutual fund scheme were to earn a gross return of 8% p.a. and the expense ratio was 1%, your net return will only be 7% p.a. For this reason, the direct plans and index funds are hot topics because the expense ratios are low, and this adds to your returns.
You need to be very careful about how ULIPs and mutual funds report their return performance. Mutual funds are far ahead of ULIPs in that regard.
I do not want this to be a post for comparing mutual funds and ULIPs. For a detailed comparison between equity mutual funds and ULIPs, refer to this post.
How do I use this information?
We have seen that ICICI Pru Signature ULIP ate into Rs 2.2 lacs of your returns (in the example considered with a set of assumptions). Gross return of 8% got knocked down to 6.57% p.a.
Not good but we have seen that even mutual fund will eat into some portion of gross returns, perhaps not as much as ICICI Pru Signature ULIP. You can argue that ICICI Signature plan provides life cover too. However, Rs 10 lacs of cover may not be very meaningful for someone investing Rs 1 lac per annum. You can always purchase a term insurance plan at a much cheaper cost. Moreover, since ICICI Signature ULIP is a type I ULIP, the effective life cover will go down over the years (as fund value grows). The life insurance component will go away completely when your Fund Value exceeds Sum Assured.
In that case, how do we use this information?
I think we can use this information to compare the cost structures of various ULIPs. Let’s do a similar exercise for some of the other popular ULIP and see the impact on returns. Just to recap, ICICI Signature ULIP IRR was 6.57% p.a.
#1 HDFC Pro Growth Plus
It is a Type I ULIP too, but the charges, especially premium allocation and policy administration charges are very high.
I generated an illustration from HDFC Life Website.
35-year-old investor. 15-year premium payment term and 15-year policy term. Annual premium of Rs 1 lac for 15 years. Assuming a gross return of 8% p.a. the policy will give you Rs 23.75 lacs.
That is an IRR of 5.56% p.a.
#2 HDFC Click 2 Invest
This is an online low-cost ULIP (just like ICICI Prudential Signature ULIP). Type I ULIP.
I generated an illustration from HDFC Life website.
35-year-old investor. 15-year policy term. 5-year premium payment term. Annual premium of Rs 1 lac for 5 years. After 15 years, assuming a gross return of 8% p.a., this policy will give you Rs 10.89 lacs.
That is an IRR of 6.14% p.a.
#3 Bajaj Allianz Life Goal Assure
This is a popular plan from Bajaj Allianz. Type I ULIP.
I copy an illustration from Bajaj Allianz Life website.
35-year old investor. 15-year premium payment term and 15-year policy term. Annual premium of Rs 1 lac for 15 years. Assuming a gross return of 8% p.a. the policy will give you Rs 26.50 lacs.
That is an IRR of 6.83% p.a.
#4 ICICI Prudential Life-Time Classic Online Plan
Now, this is a type II ULIP. Under a Type II ULIP, the nominee gets Fund Value + Sum Assured in the event of the demise of the policyholder. Clearly, that means higher mortality charges. And you will see the impact on returns.
For better understand of Type I and Type II ULIP, refer to this post. Type II ULIPs provide greater insurance but that eats into your returns too.
I copy an illustration from ICICI Prudential website.
35-year-old investor. Premium payment term of 5 years. Policy term of 15 years. Annual premium of Rs 1 lac for 5 years. Assuming a gross return of 8% p.a. the policy will give you Rs 9.44 lacs.
That is an IRR of 4.99% p.a.
Which is the best ULIP?
You can see the ULIP charges compromise returns in a big way. Depending on the cost structure, the impact may be higher or lower.
I advocate keeping insurance and investments need separate. However, if you must invest in a ULIP, you must invest in a low-cost ULIP.
From an investment perspective, a Type I ULIP is a better choice than a Type II ULIP. A Type II ULIP will provide higher insurance. However, you can purchase a term insurance plan. In a ULIP, the life cover is more expensive than a Term Insurance Plan.
A purely online ULIP is a better choice than an offline product.
You can compare the cost impact in various ULIPs. All the ULIPs must provide illustration for gross returns 4% and 8% p.a. You just need to calculate IRR for the illustrations provided to assess the cost impact. Everything else being the same, go with the one with the lowest cost impact.
Additional Links
How to select the Best ULIP for your portfolio?
How various charges in ULIPs affect your returns?
How Return Performance is reported in ULIPs, PMS, Mutual Funds etc?
After tax on LTCG on equity funds, are ULIPs better than mutual funds?
ICICI Prudential Signature ULIP page on ICICI Prudential website
Great Article Deepesh. After having done research for a low-cost online ULIP insisted upon by a client, I would add another “style factor” to look for other than low cost impact in an online ULIP:
– Fund management capability of the insurance company as returns are also linked to performance of the debt/equity fund managers. With this, I would heuristically focus insurance companies that have a sister asset management company/great investing track record
Thanks!!!
I agree that the cost can’t be the only parameter.
Fund management capability matters but how do we gauge that? A part of my apprehension also stems from the fact that I am not a very big fan of active investing. Moreover, many ULIP funds from insurance companies (who promoters run smaller AMCs) or an insurance company (with no AMC) have well-performing ULIP funds. AMCs and insurance companies are different companies anyways. Having said that, if I were to pick up a ULIP, I would also prefer insurance companies where promoters own a strong AMC too.
Very thought provoking article. It shows how these dubious claims made by the ULIP sellers could turn out to be a hoax ultimately. Well presented
Thank you
Deepesh – Can you also comment on the income tax angle on the ULIP vs other forms of investment. my sense is that when you put that into the scheme of things ULIP IRR might look even better….with that in mind does it really become a good investment product? I am trying to evaluate this carefully before I make the decision hence seeking your input.
Hi Rishi,
Purely from a tax angle, ULIP is a clear winner over equity mutual funds. I don’t think mutual fund managers are better than ULIP fund managers. Therefore, wouldn’t go into gross returns of ULIPs or MFs. Let’s assume both earn the same.
Now, we need to see weight the various costs of ULIPs outweigh the tax benefits.
For instance, mortality charges (will be higher in Type II ULIPs), loss of flexibility (you can’t exit an underperformer in ULIP), Ancillary charges are negatives with ULIPs. I have covered such aspects in this post. (https://www.personalfinanceplan.in/ltcg-tax-equity-mutual-funds-ulips-comparison/)
Do note some of these aspects can’t be quantified but you can work with certain assumptions to model. Overkill in my opinion.
At the same time, given the tax advantage and ease of understanding, you can use low-cost ULIPs in your portfolio. But you need to buy the right ULIP for you (there are so many of them, with complicated structures). Your age will also play a role. (https://www.personalfinanceplan.in/select-best-ulip/)
I prefer mutual funds.
ULIP is also tax exempted. You might save 10% that you might end up paying in MF