With the Bull Market in full swing, Insurance Agents and Bank Officials have started convincing investors that ULIPs are the best way to go. One of my friends pinged me a couple of days back asking me if he should Invest in the "SBI Life - Smart Wealth Builder" scheme. My friend was being pestered by his neighbors to invest in this ULIP because this was the next best investment choice in the country. He dint want to disappoint his neighbors because he obviously has to live in that house for many more years to come. But, at the same time, he dint want to invest in some scheme that isnt good...
So, I started looking at the details of the ULIP and realized this was yet another ULIP which, if you decide to invest, you will most likely regret your decision.
Read on to find out more...
Basic Info about the Policy - SBI Life Smart Wealth Builder
Smart Wealth Buider is a traditional ULIP policy offered by SBI Life Insurance company. This scheme has two options - a single premium option and a regular premium option. Some of the basic details about this policy are:
Guaranteed Additions up to 125% of one annual regular premium on a regular premium policy, for a 30 year policy term, subject to the Policy being in force till the maturity date.
- Guaranteed Additions starting as early as 10th policy year onwards
- No Policy Administration fees for first 5 years for Regular and Limited Premium Paying Term (LPPT) plans, thereby boosting your fund value
- No Premium Allocation Charge from 11th year onwards
- Enhanced investment opportunity through 7 varied Fund Options
- Life Insurance coverage, with minimum Sum Assured based on your age
- Flexible product with an option to increase/decrease your Sum Assured from 6th policy year onwards
- Minimum Premium Payment Term: 10 years (Max. up to 30 years)
- The policy offers 7 different investment choices with a varying % allocation towards equities. The policy holder bears ALL the RISK arising out of the Investments.
Policy Maturity Benefit: On completion of Policy Term, Fund Value will be paid out to the Investor.
Death Benefit: Higher of the Fund Value or Sum Assured is payable; with a minimum of 105% of total basic premiums paid till the date of intimation of death.
Tax Benefits: Tax deduction under Section 80 C is available. However in case the premium paid during the financial year, exceeds 10% of the sum assured, the benefit will be limited up to 10% of the sum assured.
Policy Fees and Charges
If you read the previous two sections, you might actually think the policy may be a good choice. However, you might reconsider the decision after reading this section..
This ULIP has the following charges:
1. Premium Allocation Charges - The amount that will be deducted from your monthly/yearly premium payments so that the insurance company can allocate your premium towards your insurance policy.This number varies from year to year.
2. Policy Administration Charges - This is the monthly administration charge payable by the policy-holder to the Insurance Company for them to maintain & manage his insurance policy
3. Fund Management Charges - This is the % of your investments you should pay the Insurance company so that they can invest your money into the fund investment choice of your selection. This amount varies based on your fund selection.
These charges are as follows:
4. Mortality Charges - This is the amount that gets deducted from your Investments each month to provide you with the life insurance coverage. This varies based on your age and life insurance coverage
5. Switching charges - This is the amount you have to pay to switch from one investment option to another if you exceed the 2 free switches per year. Rs. 100/- per switch
6. Partial withdrawal charges - This is the amount you have to pay if you try to make partial withdrawals from your investments. Every year one free withdrawal is allowed after the minimum lock-in period. Rs. 100/- per withdrawal
7. Other charges - If you want a duplicate copy of your statement, you have to pay this fee. Rs. 100/- per statement
So, how high are the charges?
Let us take a simple example. Lets assume my friend invested in this policy and selected a equity fund in which he paid Rs. 1 lakh each year. Lets see how much will actually get invested. See the table below:
As you can see, during the first year you are losing more than 10% of the amount invested and between years 2 to 5 you are losing more than 7% and between years 6 to 10 you are losing more than 5%. From the 11th year onwards you are losing 2% of your investment as fees & charges.
And the best part here is that, this table does not cover mortality charges or switching charges. The mortality charges will be usually along the same lines of a pure term insurance policy of the same sum assured.
Is it worth Investing in such a policy?
No, definitely not.
You can expect an average of abut 10-12% returns from a well managed equity fund. If the policy takes off about 5-10% of your investments every year for the first 10 years, the amount you are actually investing is getting reduced correspondingly. So, your reduced investments have to add another 5-10% returns in order to equal an equivalent equity oriented scheme.
In the long run, the stock market can easily help you achieve about 12% or even about 15% during bull markets but a consistent 20% every year is practically speaking - JUST NOT POSSIBLE.
How to Handle the Person Selling such a Policy?
Ok, this is a tricky part. If you know the person, personally it is a lot harder - say if that person is a relative or a neighbor. So, we gotta be polite and explain them we are not interested.
The first and foremost selling point from the agents side is that these policie swill give you tax benefits under Section 80C. Yes that is true but so will other investments like ELSS Mutual Funds that will help generate the same amount of returns at 1/10th the fees. Or, other safe investments like PPF or NSC that give you guaranteed returns along with tax benefits. Yes, if you are someone in the 30% tax slab, you save 30% of your taxes to offset the fees you are paying but why should you? Just because it is helping you save taxes doesnt mean you can just pay some random insurance company?
Secondly, the agent will most likely have a work-up like one of those tables in the pictures above with an extrapolated rate of returns at around 15% or more. The best part is, in those calculations they will consider the full 1 lakh as if it were invested FULLY. Ask them if these returns are guaranteed. They will say NO. What is the point then?
Tell the agent that you are not interested in paying such high fees. Honestly any ULIP that charges around 2-3% fees each year can be considered for investment but definitely not one that charges 8% or 10%.
What are my options?
A ULIP is nothing but a life insurance policy and an equity mutual fund combined into one. There are dozens and dozens of excellent equity mutual funds that can easily give you about 10-15% returns every year and that too with less than 1% fees. Since you are anyways gonna pay for the life insurance option provided by the ULIP, why not keep insurance separate and just take a proper insurance policy.
This is something I have been saying time and again - Please Do Not Combine Insurance and Investments.
Some Last Words:
If you are someone who is not comfortable with taking risks in equity markets, the agent will most likely tell you to select the Bond fund or Money Market Fund with guaranteed returns. Choosing such a fund scheme in such a high-fee-charging ULIP, you may end up getting less money than what you invested. At least, if you selected an equity fund, if the markets are good, you can break-even and make modest returns of about 5-6%.
Anyways, if you dont want to take risks, there are numerous "Safe" Investment options available and my most recent book covered all of the best "Safe" Investments in India. You might want to check it out. Click here to read the article on Safe Investment Havens.