It has long been a common belief amongst the investing community that for the same life insurance cover, Mutual Fund + Term Plan combination gives a better return than an Unit Linked Insurance Plan (ULIP). While this was true till recently, the change in charge structure and the subsequent abolition of service tax on charges in ULIP have tilted the scale in favour of ULIP.
The new ruling on ULIP charges
The ULIP charges will be capped at 3% for a policy with tenure of up to 10 years, of which fund management charges cannot be more than 1.5%. For policy tenures above 10 years, the charges cannot exceed 2.25%, of which fund management charges cannot exceed 1.25%. These regulations are effective from 1st January 2010.
This new ruling will mean that the amount invested from the premium would be higher and subsequently the returns would be higher than before.
Comparison of ULIP v/s Mutual Fund + Term Plan combination
| Annual Investment of Rs. 35000/- for 20 yrs. with life cover of Rs. 10 lakh | ||||||||
| Total Inv. p.a. (Rs.) | Inv. in Term Plan p.a. (Rs.) | Assumed Gross Yield | Expenses | Net Yield | Fund at the end | Death Benefit | Net Gain (excl. Death Benefit) | |
| ULIP before IRDA ruling | 35000 | NA | 6.00% | 3.50% | 2.50% | 907250 | 1000000 | 207250 |
| ULIP after IRDA ruling | 35000 | NA | 6.00% | 2.25% | 3.75% | 1049748 | 1049748 | 349748 |
| MF + Term Plan | 35000 | 1780 | 6.00% | 2.25% | 3.75% | 1000106 | 2000106 | 335706 |
| # Death benefit in ULIP is higher of either sum assured or fund value at the end. * Assumptions: Fund category is equity in both MF and ULIP; Gross yield is assumed at 6% and age of insurer = 30years. # Source: ICRA Online Research |
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Looking at the table above, we can deduce the following:
- Under the new regulations, the gain from ULIP is higher than that from MF + Term Plan combo if you survive the tenure of the policy. For the same life cover (RS. 10 lakhs), the mortality charges of ULIP totals to Rs. 22916 while the premium for Term Plan totals to Rs. 35600. Coupled with reduced charges, ULIPs turn out to be a winner.
- In case of death during the tenure of the policy, MF + Term Plan combo beats ULIP. This is because in case of MF + Term Plan combo, the nominee is able to retain the maturity value of Mutual Funds while he also gets the cover provided (Rs. 10 lakhs). While in case of ULIP, only the higher of fund value or sum assured is will be given to the nominee.
The recent Union budget has proposed to waive off the service tax on ULIP charges which will improve the returns further.
So what will you opt for?
