I write about ULIPs very rarely, but in the last year or so, several people have commented that under some circumstances ULIPs are a suitable investing option, and when Roopa posted a comment inquiring about the ICICI Pru SmartKid Premier ULIP in the Suggest a Topic page, I thought it’s finally time to read up on this and do a review of this product.
Insurance and Investment
ICICI Pru’s Smart Kid Premier is a ULIP that combines life insurance and investment, and the way it works for the life insurance part is that you choose whether one or both parents have to be insured, and based on that on the death of the parent – the insurance policy pays you out. This is called the single life or joint life option under the plan.
The insurance pays out a sum assured and it also waives off the future premiums that you would have had to pay under the policy, and you continue to get benefits as if the premiums had been paid.
And how much is the sum assured using this option? The minimum sum assured is the higher of these two amounts:
- Ten times the annual premium or
- 0.5 x policy term x annual premium
These two options exist because you can decide on a plan where you pay for only 5 years but the plan has a term of 10 years.
So, if you took out a policy with a premium of Rs. 50,000 per year for 10 years, then then sum assured will be Rs. 5 lakhs in this case. Goes without saying that this cover is a lot less than what you get from a term insurance, but then there is no investment angle in term insurance either. Now, let’s get to the investment aspect of this policy.
ICICI Pru Smart Kid Premier Investing Style Options
After they have taken away some money as expenses towards the plan, the remaining sum can be invested in a choice of funds based on three different strategies that you can opt for.
1. Fixed Portfolio Strategy: This is the first of the available strategies, and if you select this strategy, you will have the choice of actively managing your portfolio, and you can pick and choose from 8 funds that they have on offer.
The 8 funds they have on offer are the following:
| Fund Name | Asset Allocation |
|---|---|
| Opportunities Fund |
Equity: 80% Debt: 20% |
| Multi Cap Growth Fund |
Equity: 80% Debt: 20% |
| Bluechip Fund |
Equity: 80% Debt: 20% |
| Multi Cap Balanced Fund |
Equity: 60% Debt: 40% |
| Income Fund | Debt: 100% |
| Money Market Fund | Debt: 100% |
| Return Guarantee Fund | Debt: 100% |
| Dynamic P/E Fund | Invests in the ratio of debt and equity based on the P/E range of the market |
I think the name is a little misleading for this strategy because nothing is fixed here, and you have to actively manage which funds you are going to buy into.
 2. Life Cycle Based Portfolio Strategy: The second strategy that you can choose is the life cycle based portfolio strategy and in this strategy the fund moves around your money from an equity based mutual fund to a debt based mutual fund according your age. So, if you are between 26 and 35 years then the fund will have 75% of your money in the multi cap growth fund, and 25% in an income fund, but when you reach the age of 36 – that ratio will be changed to 65% and 35%. So as you get older, more of your money comes out from the equity fund and moves in to the debt fund.
3. Trigger Portfolio Strategy: In this strategy, 75% of your money is invested in the multi cap growth fund and 25% is invested in an income fund. If the equity market rises then part of your profits are redeemed and the money is invested back in the income fund so that any downward movement doesn’t eat into your profits. If the market goes down then new money is used to invest in more equity funds such that they can maintain a 75% – 25% ratio.
To sum up whate we have seen so far, the insurance is ten times your premium and then after they deduct expenses, they allow you to choose one of these three strategic investment options. The next question is how much are the expenses of this plan.
ICICI Pru Smart Kid Premier Expenses
Just like other ULIPS, there are charges under several different heads in this one too, and I’ll list them down in this section.
Premium Allocation Charge: 2% of the premium in the first year will be deducted under this charge, so if you took a policy out for Rs. 50,000 then Rs. 1,000 will be deducted from the policy during the first year for this charge. This will be zero from the second year onwards.
Fund Management Charge: 1.35% per annum will be deducted from the fund value you invest in all the funds except for the return guarantee fund where it is 1.50% and the money market fund where this percentage is 0.75%.
Policy Administration Charge: 0.47% per month will be charged from the premium as this expense from the first year to the time you are paying the premium. When you stop paying the premium (but the term still continues) this will become 0.10% every month.
Mortality Charges: These will also be deducted monthly and they have a table for this that they refer to for determining how much will be reduced. Naturally, if the life of both parents is covered the mortality charges will increase (not by double though).
Switching Charges: You have four free switches in a year, and I think this refers to switching between portfolio strategies, anything over this will be charged Rs. 100 per switch.
Miscellaneous Charges: Policy alterations will be charged at Rs. 250, and I’m not quite sure what type of policy alterations this includes.
How do these expenses affect returns?
The policy brochure has got the following illustration which shows you sample returns at 6% and 10% for two policy terms which are net of all charges, service tax and education cesses.
- Age at entry: 30 years
- Annual Premium Amount: Rs. 50,000
- Mode of Payment: Yearly
- Coverage Option: Single life
- Choice of Portfolio Strategy: Fixed (Money invested in Dynamic P/E fund)
- Premium Payment Option: Regular
|
Term = 10 years |
Term = 15 years |
|||
| Returns at 6% p.a. | Returns at 10% p.a. | Returns at 6% p.a. | Returns at 10% p.a. | |
| Fund Value at Maturity | Rs. 5,94,574 | Rs. 7,43,261 | Rs. 10,03,955 | Rs. 14,12,382 |
| Effective Return Rate | Â 3.13% | 7.1% | Â 3.56% | Â 7.57% |
I have added the last row of the above table myself, and the effective return rate is how much you are effectively getting if the fund performs at 6% or 10%. Since the amount above that is net of expenses – it is not actually based on 6% or 10% but is arrived at after deducting all the expenses.
So, in the first option you just get a return of 3.13% if the fund actually performs at 6%, and if the fund performs at 10% then you just get 7.1%, and in the 15 year term you get 3.56% and 7.57%. I think this shows fairly significant expenses and an insurance of ten times annual premium doesn’t make these kind of expenses attractive enough.
Conclusion
Having reviewed this tells me that  ULIPs aren’t as bad as they once used to be and some people may actually find use for them if they want to boost their insurance coverage for example. But as far as I’m concerned, I don’t see any compelling reason to buy this policy, and I would much rather buy a term plan and make other investments according to whatever plan and preferences I have. That way I can buy whatever mutual fund I want instead of being limited to the ones offered through this plan and can also make changes mid way.
Hi I took the smart kid ulip in 2009 and paying 2 lakh per year on some ones advise . It’s now 19 Laks in value . Is this ok ? I have 3 more premiums left I think . I switched couple of times to give the breakup from rich and flexible and balanced percentages a better balance .
Not to mix investment and insurance. So simple
One who invests in ULIPs is a stupid. No companies with ULIPs are good. ULIPs eat up your money. More than 80% surrender ULIPs before lock-in or immediately after ULIPs and some are late because they come to know about the truth late. I believed in Birla Sun Life and was robbed off. Came to know about the truth. Surrended my ULIP losing 1.5 lakh rupees (after lock-in period) and my friend 90,000 Rupees (2 months before lock-in period).
Hi Manshu
I understand that premium of every insurance product is subject to a service tax @ 12.36% (previously 10.3%), but nobody here is taking this into his calculation or ULIP is an exception to service tax.
Please clarify.
Umesh,
There are two parts to ULIP Payments.
One goes to the company expenses and another towards investment in funds. Service tax is not applicable for the money that is put in investment bucket. Only the money that is allotted towards company expenses are subjected to service tax.
Thanks, RRK
We need to review entry load ban decision again: Amfi CEO HN Sinor
http://articles.economictimes.indiatimes.com/2012-04-25/news/31399073_1_entry-load-mutual-funds-distributors
Today Mr.Sinor is talking about bringing back the entry load, If it happens, it is going to increase the Expenses for mutual fund investors. If entry load is brought back, the mutual fund plans would exceed cost of ULIP plans.
I want to know opinion of mutual fund advisers here : Are you going to stop selling mutual funds ? Or will you start selling ULIP plans again, because there will not be any difference to the investors anyway, and you can laugh all the way to bank ?
As far as costing of mutual funds or ULIPs is concerned,I always think that all these things are irrelevant when things come to equity.
For number of times markets have a daily fluctuations of 2% and above and so 2% of charges/ entry load are nothing for any equity product.
No One have complained for ULIPs about the charges as well for entry load of mutual funds till 2008 when market was doing good..
all questions arises when well turned dry….
Paresh,
I think “irrelevant” may not be right word to describe it. Cost can’t be irrelevant to investor. It is a serious stuff and eats into investor return point by point directly.
Probably during bull phase, investors become inconsiderate to the impact and sense its importance in bear phase.
ULIP or mutual fund, investors can’t be blind to costs. No matter what agent says.
Important thing is that we do not have any correct formula to compare the costings between two products.
E.g. You prove that ULIPs are superior than that of MFs and Term insurance.But few may not be agree with you.
In that sense,how to reach any conclusion about product costing?
So what I mean was investor should give importance for achieving the consistency….than anything.
Paresh,
(1) Yes, you are right about not having a simple formula to compare products. That is why we have educated honest financial planners in demand.
(2) My article intention is not to recommend ULIP plans instead of mutual funds.
Main takeaway here for investor is :
a) Pre-conceived idea that all ULIP plans are expensive or all mutual funds are cheap is very wrong.
b) Cost matters to investors. Whether it is simple product or complex product, cost need to be considered.
c) For measuring cost of a complex product, IRR formula does a good job. So, this should not be ignored.
What a novice investor who can’t understand all that mumbo jumbo, should do ?
He/she should know Insurance agent or mutual fund agent are in business of selling products to make their living. When in doubt, approach a honest adviser for help, paying a fee. Or post in public forum or blog like this, get educated. No one has your interest in mind more than you do.
Hi
really liked the conclusion. When ever this ULIP vs MF debate comes up, I always suggest one more pro that MF has over ULIP..that you can always move your investments from one fund house to another, in case performance is not satisfactory. Same thing is not possible in case of ULIP. You have brought this important point in light.
Thanks for the informative post!
This is for sure an issue. If you got stuck with a bad plan that has bad performing fund, exit is not easy. Mutual funds offer the flexibility to move to another fund house easily.
If you must choose the ULIP Plan, choose the one with many fund options and good performance record.
Manshu,
couple of things you should notice.
1) Insurance is double cover. If you are taking 10x it is in reality 20x cover. 10X cover is paid to beneficiary on death and the other part is used as waiver of premium to continue the plan.
2) I dont use the final yield figures given in the brochure.Some report higher figure excluding some costs and some include them. Anyway, assuming in this case it is 7.1% for 10 years as reported by you, the loss due to the plan expenses is 2.9%. Some mutual funds charge yearly 2%-2.25%. Compare to them these plans are slightly expensive, no doubt about that. But expenses are no so HIGH to black list them.
3) For goal based investing they do a good job and may fit in several portfolio. Term insurance + Mutual fund is not a replacement for this plan. When the insured die, the insurance plan close and make payout. The plan is not continued and no additional payment is made by anyone. But in child education plans, the waiver of benefit does this job. Dont ignore the usefulness of this feature. The question could be the – do the extra 0.6-0.7% expense justify the plan ?
There are some who like to book flight, hotels separately and do sight seeing on their own. And there are some who goes for package tour, they pay a bit extra knowingly for convenience. In this case the mental piece of the husband who knows the insurance company will fund the portfolio if he dies and take care of the money management of the education portfolio and not leave it to uninterested, unmotivated housewife to handle finances in his absence.
Different families, different problems, different solutions.
The returns from this ULIP comes when the ULIP itself invests in the underlying mutual fund and the expenses of the mutual funds will still have to be paid by the investor so double expenses for the investor!
So he will have to pay expenses of mutual funds in addition to the expense of the ULIP which as you see the administration charge alone is about 6% a year which is way above what any MF will charge.
For insurance, if you buy a term plan that will give not 20 times but a lot more than that and then that money can be invested in a FD or whatever right?
As for peace of mind, I don’t really understand how that works but that’s a personal thing so that’s fine with whatever you say.
Manshu,
The cost comparison is difficult to explain. Hence I prepared some charts to illustrate.
Please let me know your comments:
http://www.rrkfinserv.com/2012/04/ulip-plan-cost-vs-mutual-fund-cost-some.html
I appreciate this very much and in fact I spent close to 45 minutes going through the plan that you have selected as well as your calculations but couldn’t quite follow the whole thing.
I find it hard to believe that a ULIP with all its fees can actually have a higher IRR than a MF but you seem to have provided the details quite exhaustively. I will go through all the data that you have culled and respond to you.
Thank you.
In going through your calculations I see that you’ve chosen the Market Fund Options for calculating returns which has an expense ratio of 1.35% but I wanted to ask you where does that fund invest in return? Wouldn’t that fund in turn invest in another IDBI mutual fund or is this an exclusive mutual fund for the ULIP holders? Because if it does in fact invest in another IDBI fund then the expenses of that fund will be added to this fund and lower the return significantly.
Once again, thank you for the discussion. Much appreciated.
Manshu,
After reading your response, on April 18th, I wanted to pull numbers together and prepare the proper comparison tables. This is the reason for delay.
First let me appreciate your honest and candid feedback. I welcome you taking time and asking questions on this subject. I am sure this will help you, me and all our readers too. Jointly we all would learn something new.
1) There is no other mutual fund involved here; the mutual fund is run by IDBI insurance company and the expense ratio is 1.35%. These are different from IDBI mutual funds which are run from another AMC. Popular news papers like ET publish NAV of these funds once in a week. You may also find fund fact sheets published by insurance companies in their web site.
2) Yes, it may be hard to believe a plan that charges 6% as load ( in this case Policy admin charges) beats mutual fund in long run. This is the point I want to convey.
3) New age ULIP plans are not that bad compared to their counterparts of traditional plans. I still believe mutual funds are the way to go. But not for the popular reason, they are cheaper than the ULIP plans in the long run.
Just sorry for entering the conversion… RRK have placed great efforts ..so I not able to stop myself to comment inbetween.
Though RRK have done great calculation,I do not able to agree with the conclusions made by him …(number of times I am wrong)
1.Mortality charges calculated in ULIP are calculated as :sum insured – Fund value…Broadly speaking under unfortunate event of death of investor after suppose 4th year death benefit in case of ULIP will be only Rs 1olakh but in case of MF + Term plan combination it will be 10 Lakh + Mf Value..i.e.Under condition of death claim,value received in MF + Term plan combination will be much more higher.
Though ULIPs work in that way,for fair comparison combination of MF + Term plan should be shown in also similar away.
2.There is some basic difference in MF and ULIPs..Its that MF expense ratio is already incorporated in daily NAV declared….THIS IS NOT THE CASE FOR NAV OF ULIPS…Fund management charges are cut down separately via cancellation of units….
E.g IDBI Dream builder plan(Equity Fund) was launched on 17th March 2008 with NAV of 10 and after 4 years on 17th March 2012 its NAV was 13.0377…..% increase shown by the fund was 6.90% CAGR….investor has to pay FMC separately via cancellation of units…if market is lower and NAV is lower then there will be more number of units will be cancelled and it permently dimishes the compounding effect for these redeemed units.
Comparing this with Reliance Growth Fund , which one have remain average performer for last few years.
For above same period,Reliance growth have generated the returns of 7.92% CAGR…and its inclusive of all the costs.
So I think these separately redeemed units in ULIPs can prove costly for ULIP holders.
3.Mortality charges are also cut down via cancellation of units on monthly basis.Again if market remain low like last few years then investor needs to pay for more number of years than shown by you…its a two way hit as due to lower NAV more units will get redeemed while investor have to pay for more number of years.
So I think considering all these things its nearly impossible for anyone to simulate the exact things….though I think one may have combination of all mutual fund ,term insurance and one lower premium ULIP in portfolio…
Paresh, Thanks for comments.
1) There are two type of ULIPs. Type 1 pays (a) fund value OR (b)sum insured which ever is higher. Type 2 pays both fund value AND sum insured.
On goal based investing, it is better to go with ULIP-1, to avoid unnecessary mortality premium paid. You are right about Type 1 plan payments. Is it not better you pay less insurance cover as your assets grow proportionately ?
2. ULIP Plans also charge FMC as part of NAV. Other charges are taken by cancellation of units. I think IRR calculations should iron out these differences.
3. We need some method to compare the costs. I think Net Yield is the best method, I assumed 10% Gross return before expenses in both cases. We can assume a higher number like 15 or lower number like 6. Results will not be very different. You may break even after 4 years or 6 years instead 5 now.
4. I have not considered the actual performances of the ULIP funds. We did some ULIP Plan ratings some time back for a Tamil Financial Magazine called Nanayam Vikatan; We found few fund managers of ULIP plan also done a good job. So, I am not getting into the argument of which class of fund managers are best. I am addressing these issues under ‘flexibility of mutual funds over ULIP’ and give thumbs up for mutual funds. I hate the lock in that comes with ULIP. ( Personally I like flexibility for investors and for the same reason I dont like NPS on current structure)
5. I also hate mutual fund advisers without doing any home work blaming ULIP funds saying they are exorbitantly expensive – which is not. That is the only take away I want from my comparison study.
Thanks again for taking my article seriously and commented about it. This is the only way we can learn from each other.
Thanks for your response RRK. and thanks for jumping in Paresh. Your comments and views are always welcome and this and all the other topics that you’ve regularly leave comments on so please feel free.
Thanks Manshu..I need to take care as I have banned at few locations due to critique writing.
@RRK:
I think if any ULIP is paying Sum assured + Fund value then it will charge mortality charges for whole period of policy..and these charges will be incremental with age of policy holder….
You are true that FMCs are part of NAV ,,It should be “Policy administration charges (PACs)”[By error, I type it as FMCs above ] are not part of NAV and can be applied via cancellalation of units.
Though in general FMCs of ULIPs are 1.35% and expense ratio of mutual funds is around 2%,,its not the case that NAV of ULIPs have outperformed to MFs.
So I think in reality,Mfs will prove better than ULIPs,,at least considering the charges.
Sorry for another question, but I was trying to see historical performance for this ULIP fund and couldn’t find it. What I”m trying to do is to compare this fund with other diversified funds during the last 3,5 and 10 year period and just see how it looks like. Do you know how I could do that?
Thanks again, RRK.
Manshu,
I dont have an easy answer for that. I know ET publish NAV of ULIP plans.
Also each of the company website may have this data.
Here is the link for ICICI Prulife data:
https://www.iciciprulife.com/public/Fund-Performance/Performance-Summary.htm
If you are looking for something like VRO rating, tough luck ! It will be helpful if any of your blog readers know an easy way to get this data. I wonder why VRO wont rate any of these funds..
Thanks, I guess this will have to do even though it is not very clear to me which fund I’ll end up owning if I choose the Nifty Index option in the Wealthsurance plan, guess this is better than having nothing at all.
As per my understanding one of the major selling points for ULIPs is income tax benefit under section 10(10D) wherein any sum received including sum allocated by the way of bonus is exempt from tax. You would not get that benefit by taking a term plan for insurance and then making investments in mutual funds of your choice. Am I missing something here?
Hi Amit
I am sorry I did not get your point clearly. Can you please explain in detail by citing example(s) what benefit you get only/exclusively under section 10 (10D) and what not if you take a term plan and investment in mutual fund separately.
Income tax exemption under Section 10(10D) are available for Maturity and Death Claims proceeds, as the case may be, under insurance. You are pointing about one of them or for both of them. Please explain citing example(s) as the case may be.
Yhanks
I think Amit is referring to this
http://www.onemint.com/2012/03/21/budgets-impact-on-insurance-policies/
I’m not quite sure whether this is included as part of 80C or not Amit, but there are several other things that I would say are better investments that are included in 80C, so that alone shouldn’t be a driving factor to opt for ULIPs.
I can’t understand why IRDA is not doing anything about it.
The term insurance + pure investment scores above any ULIP of any Insurance company, period. These days, the insurance companies are trying to mask their overall high charges for ULIPs by lowering premium allocation charges and jacking up policy administration charges! Hemant is spot on about this. Few years ago, the policy admn charges used to be around Rs. 60 per month. Now they are linking it to premium amount and 5.64% per year is a rip off.
Note the following:
1. The IRR of ULIPs over a policy term is too low to be considered as investment product.
2. By falling to the temptation of ULIPs due to smooth sales talk of an agent, there is a tendency to underinsure aka KILB (Kum insurance lene ki bimari) !
3. The amount of insurance needed which is calculated based on human life value (HLV) can be afforded only by term insurance. ULIP premiums would be too high and no salaried person can affort it.
I can’t understand
And also to your last point, it looks like ULIPs limit the max premium and in this case I think that’s a lakh so even if you wanted to you can’t take out a big policy.
Hi Manshu,
If you look at this charge “Policy Administration Charge: 0.47% per month” – this turns out to be 6% every year. (or 6% entry load kind of situation)
Absolutely Hemant – I didn’t know about this before reading the document on this policy and that’s when I learned that this is where they are charging and calling it a monthly number to make it appear small.
You are right that ULIPs are not as bad as they used to be but still the charges are way too high. ULIPs are for people that are not good at math, because if they did the math they would realize how inefficient these products are.
That’s certainly true for this policy, and I’ll be surprised to see if there is any policy that proves to be an exception to what you’re saying.