Don't Invest in Highest NAV Guaranteed ULIP's- See Why

'Highest NAV Guaranteed' product is the new buzz started by most of the insurance companies in today’s time, but does it make sense to go in for it?

LIC Wealth Plus

ICICI Prudential Pinnacle

Tata AIG Apex Pension

Bajaj Allianz Max Gain

Max New York Life Smart Xpress

SBI Life Smart Ulip

And many more by other insurance companies

What the investor thinks?

The impression it leaves in the mind of Investor that one will get guaranteed highest returns in the period. The kind of words agents are spreading is that you will get the Highest NAV as per stock market performance as if the fund will participate in the equity market growth. However that is not the case. What a company guarantees is the highest value of its own NAV. For guaranteeing the NAV they will have to invest in debt products whose maturity value is equal to the guaranteed value.

Just like to ask one question, what if market falls drastically in the fifth policy year, say 50%, the way we have seen BSE Sensex (market) going from 22000 levels in January 2007 to 8000 levels in December 2008? Will the Insurance Company pay from its own pocket to compensate that loss? Is the risk of in this investment is owned completely by the Insurance company? I have never seen any company bearing the risk of investment in the equity market. Don’t you smell something fishy?

Every guarantee comes with a cost and just figure out what would be the cost in this scenario.

How these kind of products work?

This is very simple and even you can also manage your existing ULIP policy with similar kind of return. Here, the portfolio is managed and allocated dynamically between debt and equity in a way that the highest NAV attained is locked by moving a portion of equity assets to debt, whose maturity value will be equal to highest NAV attained till then.

Just check any of your existing ULIP policy. You have different kind of fund options i.e. equity, balanced and debt. Simply remain 3 years in equities and then switch completely to debt after that and remain invested in debt. However you again switch to equities for sometime if there is a drastic fall in the market.

Fund managers will be doing exactly the same thing mentioned above however there switching will be more dynamic. Remember their asset allocation strategy clearly says

Equity: Upto 100%

Debt: Upto 100%

It means that you have no control over the fund and even if they remain invested in debts for complete tenure, you don’t have any say as you have signed in terms and conditions.

Upsides of the product

·         It offers capital guarantee from day 1. You are assured that you will get your principal back. However that’s not the great proposition as guaranteeing a capital with freedom to invest 100% in debt is no big deal.

·         You are assured of whatever growth happens in its portfolio, in terms of NAV. For risk averse investors, it is a major source of comfort as they know that the principal is safe and any growth in NAV is locked in (something like the concept of reversionary bonus in traditional policies).

·         Insurance company is taking advantage of equity exposure in the beginning and overtime it is shifting to debt – which is somewhat like lifecycle fund management strategy, however after 3 years majority or full portfolio will be switched to debt.

Downside

·         You would be disappointed if you think that you will be getting complete benefit of equity market upside as the product guarantees Highest NAV and not what Highest NAV would be like. There is no guarantee of any fixed rate of return. Guarantee Word here is highlighted more just to attract us but does not give any clear picture.

·         This then turns out to be a product that has a fairly long maturity – at least 3 years or more. For a return that is expected to be somewhat higher than a debt product, locking in for long periods makes no sense.

·         Guarantee of highest NAV is applicable only at maturity, not otherwise. This clause immediately makes the product less attractive as it is a long duration product. Any partial or full withdrawal from you in case of emergency, would bar you from getting the benefit of Highest NAV.

·         This type of policy is loaded heavily with allocation charges in first five years. In Addition to that there are a higher fund management charges as well as policy administration charges.

·         It can be treated as more of a debt oriented product which will give some returns with an equity kicker in the earlier years. It is like a hybrid product like MIP, with the difference that the equity portion comes down over time.

·         You have no control on your investments i.e. you don’t have an option to switch between equities and debts at your choice which you have in other Ulip products.

Conclusion

Not a very good proposition for an aware investor who is looking for returns of the equity market as policy is loaded with Allocation Charges, Policy Administration Charges, Fund Guarantee Charges and has no control over the portfolio. Any partial or full withdrawal from you would deprive you the highest NAV guarantee defeating the purpose of this investment. Infact this kind of policy would be much more taxing in that scenario as the returns would be much lesser to any other policy where equity portfolio is higher.

If you have fair understanding of market and switch smartly, better go for ULIP's with Lower Charges like

LIC Market Plus(Single Premium)

Bajaj Allianz I GainII(Most recomended)

Bajaj Allianz

Bajaj Allianz Wealth Gain

Bajaj Allianz Retirement Advantage(Single Premium)

ICICI Prudential ACE

IDBI Fortis Wealthasurance

All the single premium policies have an option to pay topup Premium which is also eligible for tax benefit equally with very low or nil allocation charges making it more attractive.

Comparison of features with highest NAV products:

	SBI Smart ULIP	ICICI Pinncle	Bajaj Max Gain	LIC’s Wealth Plus
Min/Max Entry	8/60 years	8/65 years.	8/60 years	10/65 years
Max Maturity	70 years.	75 Years.	70 years.	75 years
PPT/Term	3 or 5 year/10 years	3 Years./10 Years	7/10 years	3 or single/8 years
Min/Max Premium	50,000 yearly	50,000 yearly	25,000 PA/No limit	20,000 PA or 40,000 Single premium
Min/Max SA	5 times yearly premium	5 times yearly premium	5 times yearly premium	5 times yearly prem /1.25 times single premium

Entry premium is less compared to other ULIP and in addition to it there is a single premium option. Maturity amount is also paid at the end of the term which is 8 years.

After policy term an extended risk cover is provided for the next 2 years in which on death SA is paid to the nominee.

Charges: 

	SBI Smart ULIP	ICICI Pinncle	Bajaj Max Gain	LIC Wealth Plus
Allocation charge(% of premium)	15% 1st year, 5% thereafter.	14% first year, 4% 2nd year, 2% 3rd year.	For lower premium band it is 20% in 1styear, 6% in 2ndyear, 3% in 3rdyear, NIL therafter.	For lower price band 12% in 1styear. 2.5% thereafter. 5% for single premium.
Policy Admin. charge	Rs. 60 pm throughout term + Rs. 5 per year per thousand SA for first 3 years.	Only for 1st 3 years, between 0.40% to 0.60% pm of annual premium.	1.26% of First years SA perm month for entire term.	Rs. 60 pm for 1st year, Rs. 25 pm for 2ndyear, 3% pa increase from 3rd year.
Fund. Mgt Charge	Between 0.25 to 1.50% pa	1.35% PA + 0.10% PA (for guarantee of highest NAV)	1.25% PA	1% pa
Surrender Charge	3rd Year: 9% , 4th Year: 2%, 5th Year + NIL	3rd Year: 4% , 4th Year: 2%, 5th Year + NIL	NIL	NIL allowed after completion of 3 year.

Maturity:

	SBI Smart ULIP	ICICI Pinncle	Bajaj Max Gain	LIC Wealth Plus
Highest NAV	For first seven years based on two reset dates each months.	First seven years based on daily NAV.	For entire term of 10 years based on daily NAV.	For 7 years based on daily NAV
Other addition	NIL	3% of fund value	% of Total Allocation charge(see below table.)	2 years extended risk cover where SA is paid in case of death.

Related Articles by Categories