Analysis: ULIP Vs ELSS + Term PLan

I have recently evaluated Unit Linked Insurance Plans (ULIPs) - the idea here is
that you put in your money and it ’’grows’’ with time. So you also have life cover
(i.e. your family gets money if you die) and money also grows at the same time.
You get ’’units’’ like in mutual funds, and the value of these units grows because
the company invests it for you. You also get a tax benefit under section 80C.
That’s a very simple way to look at things. But is it actually better than using
other options? What is the real ’’cost’’ of such a plan?
I was pointed to http://www.iciciprulife.com/ipru/docs/lifelink2.pdf for a
comparison. This is a ’’single premium’’ plan (you don’t have to pay every year),
with a Rs. 50,000 minimum premium.
Now you need to know - is this plan the best way to go?
Let’s take an example of someone (say Saifullah, 30 yrs old) who wants to invest
Rs. 50,000. This will include investment amount plus premium for an insurance
policy, sum assured of Rs. 250,000. Let’s say Saifullah has no problem locking
his money in for three years, but wants to exit after three years.
In a ULIP, Saifullah would pay (taking the Pru ICICI Life Link 2 as an example):
- Entry load of 5% = Rs. 2,500
- Admin charges of Rs. 20 p.m. = Rs. 240 per year.
- Mortality charges of Rs. 140 per year. (Approximate)
- Fund related charges of 1.5% (maximiser plan) = Rs. 750.
This means the amount that is paid out as charges is: Rs. 3,630.
Money actually invested using ULIP is Rs. 46,370/-.
Now if Saifullah decided to use ELSS for investment and a term plan for insurance.
Term plan cost (@Rs. 300 per lakh for 2.5 lakhs) = Rs. 750. (Most plans have a minimum, but this is just for illustration)
Money left for investment = Rs. 49,250. If Saifullah puts this in an ELSS he gets charged:
- 2.5% entry load = Rs. 1,232.
- Fund management (it’s a hidden cost in MFs) @1.5% = Rs. 740
So money invested using ELSS is Rs. 47,278/-.
That means, if you use the ULIP route, around 2.5% LESS of your money is invested.
There’s another disadvantage. Let’s say Saifullah dies in the third year - How much does his family get?
In ULIP case, the limit is the HIGHER of invested units or the sum assured, in this case: Rs. 2, 50,000.
In ELSS +Term Plan case, ELSS is recovered in full, around Rs. 50,000 (Assuming terribly low growth in three years of the
invested amount) Term plan pays out full sum assured of Rs. 2,50,000. What this means is the family gets Rs. 3, 00,000.
Looking at this, I feel ULIP is not a good option when compared to taking a term plan for insurance and ELSS for investment.
(That’s putting it lightly. Frankly, it’s a lousy investment)
(note: tax savings on both schemes are the same)
Further Note: I personally cannot invest Rs. 50,000 as a single time premium - I would rather choose something that takes 20 to
30 K per year, and grows. For THAT, the ICICI plan is: Lifetime Pension II.
But, guess what, in the first year I lose 22% of my money to allocation fees in that plan! These fees will take away any advantage
the funds actually have.
I would much rather choose Term Plan + ELSS. (Or Term Plan plus a FIXED deposit).
ELSS has it’s disadvantages too, but those are far overridden by the costs of ULIP. I would actually suggest a regular Equity Fund
plus a term plan
Article: A comparitive performance analysis of ULIPs and MF(ELSS)
Agents are selling ULIPs (Unit Linked Insurance Plans) saying that they have
WAY lower management fees and they will therefore, in the long run generate
better returns as compared to mutual funds. HDFC Insurance for instance has a
0.8% management fees versus typically 2% fees by regular mutual funds. Now
over the long run, says HDFC Insurance, the difference in management fee and
lower entry loads will make a huge difference and lead you to greater returns.

They typically show you a spreadsheet showing a comparative analysis, taking

2.5% as annual management fees for a mutual fund (the max. a fund can
charge) + 2.25% entry load for your yearly investment. On the ULIP end, they
reduce all the annual charges - 0.8% management fee, some monthly fees and
some commissions. Then they assume both funds will grow at the same rate -
say 10% - and demonstrate how, at the end of 20 years, ULIPs will yield a better
return.

They may be right, but only if returns from mutual funds and ULIPs are similar.
Let's run a check over the last three years, for the ULIPs that really have existed
that long.
A pure NAV comparison:

27-Apr-2004 27-Apr-2007 Gain Comments

ULIPs
HDFC Insurance 21.259 54.9965 158.70% Growth Fund
Lifelink
PruICICI Life 21.43 45.69 113.21% maximiser
Aviva Life Bond 10.725 26.721 149.15% Growth
Kotak Dyn Growth 14.71 27.322 85.74%
Tata AIG Equity 10.469 26.09 149.21%

Mutual Funds (ELSS)

HDFC Taxsaver 42.619 142.77 234.99%
Included all
SBI Magnum taxgain 23.72 83.56 252.28% dividends
ICICI Taxplan 28.27 87.5 209.52%
Franklin TaxShield 53.34 127.1134 138.31%
Included all
Tata Tax Saving 25.9001 52.9513 104.44% dividends
HDFC Prudence 47.484 114.512 141.16% Balanced fund

obvious here that ULIPs have severely underperformed mutual funds. For
It is
a three year period, the best performing ULIP returned 159%, and the best
performing ELSS fund returned 252%. In fact, HDFC's own tax saving mutual
fund returned 75% more (over three years) than its insurance growth fund!
I have not considered ALL mutual funds - only tax saving funds. The results are worse for
ULIPs if you consider strong growth funds like Reliance Growth, SBI Magnum Global
etc. I have also disregarded any shorter term than three years - it doesn't make too much
sense to compare in those terms.

If ULIPs are to really go away from paper spreadsheets and beat mutual funds as
an investment product, they must pull up their socks and perform. Their claims of
lower management fees only makes financial sense if they yield as much or
better returns.