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How good are ULPs?

Universal life plans may be more transparent than traditional plans. But will they fulfil your insurance and wealth-creation needs?

Most of us at some point or the other have found ourselves in a tight spot where despite knowing the importance of paying premiums regularly for covering our lives against eventualities, we have deliberately skipped payment for want of funds. Though the option of reviving a lapsed life insurance policy exists, the process can be tedious and time consuming, and can also result in monetary loss.

At that point of time, you would have probably wished that your insurer offered the flexibility of paying the premium for your life cover according to your convenience: pay the premium when you have the funds and skip payment if there is a dearth, without the fear of your policy lapsing.

To address this issue, insurance companies have devised policies, called universal life policies (ULPs), which not only offer flexibility of paying premium according to one's convenience but also allow one to alter the premium amount and the death benefit.

What are ULPs?
A universal life policy is a hybrid product that blends the features of both traditional plans and of unit-linked insurance policies (ULIPs). Like traditional plans they offer guaranteed returns. They are also somewhat like ULIPs in the sense that they are transparent about declaring charges and the rate of return earned by your investment corpus.

Says the chief executive officer of an insurance company that had launched these products in India: “Universal life policies actually are as simple as maintaining a personal savings account with the added advantage of a life cover.”

In a universal life plan, the premium over and above the insurance (or mortality) charge, commission and expenses goes into a cash or savings account on which the insurer pays a guaranteed rate of interest. This rate of interest is declared at the beginning of a pre-identified period (monthly/half-yearly/quarterly). In case a person stops paying premium, the cash balance is used to meet the expenses associated with providing death cover. Hence the policy continues as long as the cash balance lasts.

Key features
Flexibility of paying premiums.This is the product's USP. In a ULP, the policyholder has the freedom to change the frequency of premium payment over the policy's life. One can pay the premium when one has the money and skip payment in case of shortage of funds.

Adjustable death benefits.In a universal plan, the policy holder also has the flexibility to alter the premium amount and hence the death benefit throughout the policy term. This kind of product is particularly suitable for people whose income flow is irregular or seasonal. In its recent draft guidelines, the Insurance Regulatory and Development Authority (IRDA) has proposed that at the age of 65 the policyholder should be given the option to alter the sum assured. Risk premium should be levied from the policy holder only with his prior written consent.

Lapse protection.Universal life policies offer freedom from the fear of policy lapsation in case the policy holder fails to pay a couple of premiums. As mentioned earlier, the balance in the cash account takes care of the policy cover expenses when one fails to pay the premium, thereby preventing the policy from lapsing.

Cash withdrawals.Universal life plans give investors the opportunity to make partial withdrawals from the account balance generated over the policy term. However, insurance companies have a limit on the number of free withdrawals that can be made during a policy year. Withdrawals beyond that incur a charge.

Guaranteed returns.Another benefit this product offers is guaranteed return on the account balance. Till now the guaranteed rate was declared at the beginning of a pre-defined period, for example a quarter. However, IRDA has proposed that the rate should be declared at the beginning of each financial year. “The guaranteed interest rate shall be paid on the annual premium irrespective of the mode of premium payment,” it says.

Key concerns
Flexibility to alter insurance cover.Surprisingly, this is one feature that insurance companies are using as a USP of the product to push sales. However, financial planners believe it could work as a double-edged knife. They feel giving small and not so well-informed investors the flexibility to decide their death benefit could lead to under-insurance. Says Arvind A. Rao, a Mumbai-based independent financial planner: “Small investors often do not have the knowledge to know exactly how much life cover they need. If they are given the freedom to alter their life cover and investments, they may end up taking wrong decisions.”

Neither here nor there.Financial planners also feel that these products neither provide enough life cover nor generate the kind of wealth one may need in future. The guaranteed returns are low - about 3.5 per cent per annum - and the minimum life cover is 10 times the yearly premium. Says Binay Taluja, executive vice-president, Bajaj Capital: “These products are a notch better than traditional plans, but we still feel linked plans (ULIPs) are better for wealth creation.”

High expenses.IRDA's recent decision to issue guidelines on ULPs was borne out of the need to rein in the high commissions being paid to distributors. Financial planners feel there are better products available in the market that have lower costs. According to Kartik Jhaveri, an independent financial planner, “The priority of these products is to enable distributors to earn high commissions. Any product that has distributors' interests as its first priority cannot be good for investors.” He further adds: “I still feel a combination of term plan and mutual funds is a far better and cheaper option.”

Though universal life plans are an improvement over traditional plans in terms of transparency and flexibility, they do not give you adequate life cover, nor will they enable you to build the kind of corpus that will help you meet your future financial needs. The consensus among financial planners is that a combination of term plans and mutual funds will meet investors' needs better.

It will be interesting, though, to see what sort of guidelines on ULPs the insurance regulator comes up with. Already, however, some within the insurance industry have begun writing this product's obituary. Says the chief executive officer of a wealth management company: “ULIPs managed to stage a comeback after the overhaul in rules governing them, but I don't see ULPs recovering from here.”