Published in The Hindu - Sunday Magazine on Feb 1, 2009Despite the proliferation of Guaranteed Return Schemes that offer tax waiver, term life insurance and investment benefit, the fact is that they come with many hidden clauses and hefty charges. This tax season, with the stock market at rock bottom levels, investors will be better off investing directly in ELSS mutual funds (Equity Linked Savings Scheme). Those seeking life insurance security must enroll into a separate pure risk term cover life- insurance plan in addition to their ELSS investment.
‘Guaranteed Return’ schemes are either single premium or annual premium insurance plans. It seems the rise in popularity of ‘Guaranteed Return’ schemes is four fold: they offer tax benefit, they offer insurance cover, they provide investment returns (with either fixed return guarantee or minimum maturity guarantee over a 5 yr or 10 year lock-in period), they levy hefty charges (for the insurance company/ agents to pocket). Let’s evaluate by taking the features apart:
Tax Benefit (the only good thing about the schemes)
Not only is the premium that you contribute (either upfront or on an annual basis) eligible for exemption under section 80c, the maturity value is also exempt from tax.
Death Benefit
The single-premium ‘Guaranteed Return’ plans (including the superhit Jeevan Aastha) typically offer little cover in terms of life insurance compared to the premium amount. Beware of tricks that claim high first year insurance cover that drops to a fraction by the end of the term (that’s crazy! Ain’t it?). I guess after enrolling in the scheme, one needs to kick the bucket ASAP in order to avail of maximum benefit. Some single-premium ‘Guaranteed Return’ ULIPs (Unit Linked Insurance Plans) that do offer higher insurance cover deduct the corresponding ‘mortality charges’ upfront. That means the insurance cover is not ‘free’ as your agent would make you believe.
The other variety: annual-premium ‘Guaranteed Return’ ULIPs, offer a ‘death benefit’, which is usually either the fund value only (as on date) or the sum of fund value and ‘sum assured’ (insurance claim). The first option is not insurance really and the latter option comes with a high ‘mortality fee’ (monthly or annual charge in return for the insurance cover).
The question is: if you are anyway going to be charged for your insurance, why don’t you just pay the relevant fee (or probably even a lesser amount) and take a separate pure risk term insurance plan? What’s the point in jointly taking insurance along with the investment scheme?
Lacklustre Investment Returns (after netting off charges)
Some single premium ‘Guaranteed Return’ plans (such as your Jeevan Aastha or Aegon Religare Guaranteed Return Plan) offer fixed post tax investment return of around 7% p.a. over a period of 5 to 10 years. For those in the highest tax bracket, this translates about 1% higher annual post tax returns compared to 5 year Bank FD or NABARD bond, which are also eligible for 80c tax deduction. This is because investors in Bank FD or NABARD Bond have to pay a tax on interest earned at time of maturity (computed based on tax slab). For lower tax brackets, the 1% return differential pretty much disappears. Either ways, I don’t think there is anything to salivate over, at least not to the extent the schemes are promoted. You could invest in a PPF (upto Rs 70,000 p.a. with 80c deduction) and get 8% p.a. tax-free returns.
Other single premium ‘Guaranteed Return’ plans are ULIPs e.g. Bajaj Allianz Capital Shield, which offers a guaranteed maturity value after a 5-year term that is equal to your first premium amount! Can you believe that! This means they don’t even guarantee fixed-deposit returns on your premium. Their argument is that this is only a minimum guarantee i.e. you will reap higher returns from this scheme if the stock market goes up, as they would invest your premium amount in mutual fund(s). It doesn’t take a genius to figure out that the stock market will definitely go up over the next five years as long as the world doesn’t come to an end! Then why do you need this scheme? You could directly invest in a mutual fund at a much lower cost! Speaking of cost, the charges for the scheme are as follows: 2% one-time premium allocation charges, 2.75% p.a. recurring fund management charge, 2% withdrawal charge at maturity. This is in addition to the separate mortality charge that you have to pay for the life insurance cover.
The annual premium ‘Guaranteed Return’ ULIPs typically require you to pay premiums for a minimum of three years and allow withdrawal of funds after 5 years lock-in. Just like the single-premium ULIPs (discussed above), these plans also invest your premiums in mutual fund(s) and offer a minimum return guarantee – but only on your first premium! Even this guarantee becomes meaningless if you account for the charges. So here again investing directly in a mutual fund seems to be a better and cheaper option.
The recently launched ICICI Prudential Return Guaranteed Fund or ‘RGF’ is a good example of how charges diminish ‘guaranteed returns’. One unit of the RGF is available for Rs 10 NAV with a guaranteed return of Rs 15 NAV (50%) after 5 years. This wonderful scheme (I am kidding) can be availed if you enroll in their annual premium ULIPs: Life Stage Pension or Life Stage Gold. All right you may say! Atleast I am getting 50% minimum guaranteed returns for my first premium. The answer is ‘no’, because only a portion of your first premium is used towards purchase of units. About 20% of the premium is deducted towards premium allocation charge! That means although you expect a total return of 50% (Rs 10 NAV to Rs 15 NAV after 5 years), your effective guaranteed return after charges would be much lesser – close to 20% after 5 years. That’s a pathetic guarantee! You would earn more in a Bank FD.
Furthermore, some of the other charges such as policy administration charges (6% p.a.) and mortality cover are deducted by cancellation of units. That means you won’t even realize it: while you keep your focus on the rising NAV, the number of units will gradually keep reducing over the years! It is almost as if you can call the product ‘Charge Guarantee Scheme’ instead of ‘Return Guarantee Scheme’.
Summary
‘Guaranteed Return’ insurance plans neither offer return guarantees that are significantly better than other fixed return instruments (such as Bank FDs, PPF etc) nor cheap insurance cover. In fact the ULIPs that offer these schemes just invest in mutual funds. So, why pay extra charges and succumb to hidden clauses?
The best and the most lucrative use of your capital for this tax-planning season is to directly invest in a well-established ELSS mutual fund. These carry very low charges when compared to the ULIPs or other ‘Guaranteed Return’ Insurance cum Investment plans. Just because you made the wrong decision of investing in the market at the peak it doesn’t mean you should shy away from making the right decision of buying when it is cheap!
If you are concerned about ‘death benefit’, buy a dedicated life insurance policy – a pure risk cover without the bells and whistles of endowment, investment, money back, ‘guaranteed return’ etc. That way you can pay a low premium and you know exactly what you are getting. eg. LIC’s Jeevan Anmol offers a pure risk term cover. If you are a 30 year old, for a single premium of Rs 8,300 or annual premium of Rs 1, 200 you can get a 10-year term life cover of Rs 5 Lakhs (i.e 400 times your annual premium or 60 times your single premium).
‘Guaranteed Return’ schemes are either single premium or annual premium insurance plans. It seems the rise in popularity of ‘Guaranteed Return’ schemes is four fold: they offer tax benefit, they offer insurance cover, they provide investment returns (with either fixed return guarantee or minimum maturity guarantee over a 5 yr or 10 year lock-in period), they levy hefty charges (for the insurance company/ agents to pocket). Let’s evaluate by taking the features apart:
Tax Benefit (the only good thing about the schemes)
Not only is the premium that you contribute (either upfront or on an annual basis) eligible for exemption under section 80c, the maturity value is also exempt from tax.
Death Benefit
The single-premium ‘Guaranteed Return’ plans (including the superhit Jeevan Aastha) typically offer little cover in terms of life insurance compared to the premium amount. Beware of tricks that claim high first year insurance cover that drops to a fraction by the end of the term (that’s crazy! Ain’t it?). I guess after enrolling in the scheme, one needs to kick the bucket ASAP in order to avail of maximum benefit. Some single-premium ‘Guaranteed Return’ ULIPs (Unit Linked Insurance Plans) that do offer higher insurance cover deduct the corresponding ‘mortality charges’ upfront. That means the insurance cover is not ‘free’ as your agent would make you believe.
The other variety: annual-premium ‘Guaranteed Return’ ULIPs, offer a ‘death benefit’, which is usually either the fund value only (as on date) or the sum of fund value and ‘sum assured’ (insurance claim). The first option is not insurance really and the latter option comes with a high ‘mortality fee’ (monthly or annual charge in return for the insurance cover).
The question is: if you are anyway going to be charged for your insurance, why don’t you just pay the relevant fee (or probably even a lesser amount) and take a separate pure risk term insurance plan? What’s the point in jointly taking insurance along with the investment scheme?
Lacklustre Investment Returns (after netting off charges)
Some single premium ‘Guaranteed Return’ plans (such as your Jeevan Aastha or Aegon Religare Guaranteed Return Plan) offer fixed post tax investment return of around 7% p.a. over a period of 5 to 10 years. For those in the highest tax bracket, this translates about 1% higher annual post tax returns compared to 5 year Bank FD or NABARD bond, which are also eligible for 80c tax deduction. This is because investors in Bank FD or NABARD Bond have to pay a tax on interest earned at time of maturity (computed based on tax slab). For lower tax brackets, the 1% return differential pretty much disappears. Either ways, I don’t think there is anything to salivate over, at least not to the extent the schemes are promoted. You could invest in a PPF (upto Rs 70,000 p.a. with 80c deduction) and get 8% p.a. tax-free returns.
Other single premium ‘Guaranteed Return’ plans are ULIPs e.g. Bajaj Allianz Capital Shield, which offers a guaranteed maturity value after a 5-year term that is equal to your first premium amount! Can you believe that! This means they don’t even guarantee fixed-deposit returns on your premium. Their argument is that this is only a minimum guarantee i.e. you will reap higher returns from this scheme if the stock market goes up, as they would invest your premium amount in mutual fund(s). It doesn’t take a genius to figure out that the stock market will definitely go up over the next five years as long as the world doesn’t come to an end! Then why do you need this scheme? You could directly invest in a mutual fund at a much lower cost! Speaking of cost, the charges for the scheme are as follows: 2% one-time premium allocation charges, 2.75% p.a. recurring fund management charge, 2% withdrawal charge at maturity. This is in addition to the separate mortality charge that you have to pay for the life insurance cover.
The annual premium ‘Guaranteed Return’ ULIPs typically require you to pay premiums for a minimum of three years and allow withdrawal of funds after 5 years lock-in. Just like the single-premium ULIPs (discussed above), these plans also invest your premiums in mutual fund(s) and offer a minimum return guarantee – but only on your first premium! Even this guarantee becomes meaningless if you account for the charges. So here again investing directly in a mutual fund seems to be a better and cheaper option.
The recently launched ICICI Prudential Return Guaranteed Fund or ‘RGF’ is a good example of how charges diminish ‘guaranteed returns’. One unit of the RGF is available for Rs 10 NAV with a guaranteed return of Rs 15 NAV (50%) after 5 years. This wonderful scheme (I am kidding) can be availed if you enroll in their annual premium ULIPs: Life Stage Pension or Life Stage Gold. All right you may say! Atleast I am getting 50% minimum guaranteed returns for my first premium. The answer is ‘no’, because only a portion of your first premium is used towards purchase of units. About 20% of the premium is deducted towards premium allocation charge! That means although you expect a total return of 50% (Rs 10 NAV to Rs 15 NAV after 5 years), your effective guaranteed return after charges would be much lesser – close to 20% after 5 years. That’s a pathetic guarantee! You would earn more in a Bank FD.
Furthermore, some of the other charges such as policy administration charges (6% p.a.) and mortality cover are deducted by cancellation of units. That means you won’t even realize it: while you keep your focus on the rising NAV, the number of units will gradually keep reducing over the years! It is almost as if you can call the product ‘Charge Guarantee Scheme’ instead of ‘Return Guarantee Scheme’.
Summary
‘Guaranteed Return’ insurance plans neither offer return guarantees that are significantly better than other fixed return instruments (such as Bank FDs, PPF etc) nor cheap insurance cover. In fact the ULIPs that offer these schemes just invest in mutual funds. So, why pay extra charges and succumb to hidden clauses?
The best and the most lucrative use of your capital for this tax-planning season is to directly invest in a well-established ELSS mutual fund. These carry very low charges when compared to the ULIPs or other ‘Guaranteed Return’ Insurance cum Investment plans. Just because you made the wrong decision of investing in the market at the peak it doesn’t mean you should shy away from making the right decision of buying when it is cheap!
If you are concerned about ‘death benefit’, buy a dedicated life insurance policy – a pure risk cover without the bells and whistles of endowment, investment, money back, ‘guaranteed return’ etc. That way you can pay a low premium and you know exactly what you are getting. eg. LIC’s Jeevan Anmol offers a pure risk term cover. If you are a 30 year old, for a single premium of Rs 8,300 or annual premium of Rs 1, 200 you can get a 10-year term life cover of Rs 5 Lakhs (i.e 400 times your annual premium or 60 times your single premium).
15 comments:
The explaination cant get better than this.
India still takes its decision on emotions and words like "guaranteed" and "assured" , they dont understand concept of purchasing power , compounding. They dont understand stock markets behaviour or cycles and this is what companies take benefit of .
I have cried all over my personal blog about why anyone in there senses must avoid LIC jeevan Astha or ICICI RGF , but do people listen , Jeevan astha is all set to create records for Great collections .
Links :
http://www.jagoinvestor.com/2008/12/jeevan-astha-another-idiotic-product.html
http://www.jagoinvestor.com/2009/01/icici-prudential-rgf-2-out-of-10.html
India is not becoming a "investing nation" , from "saving nation" , But still there is a long way to become a "smartly investing Nation"
Manish
http://www.jagoinvestor.com
Hi Shyam,
This post is surely an eye opener for all those investors who blindly go by the pleasant sounding words.
I have made comparision between lot of pilicies that offer returns + Tax benefits but could not find one as their future benefits did not seem matching to the cost of living expected after 15 / 20 years.
Kindly advice us on a good ELSS. If you don't mind.
I need to invest around Rs 50000 for Tax saving purpose in mutual fund . Can you please suggest me a good return mutual fund with no hidden charges
I have some comments about the article posted by Posted by Shyam Pattabi regarding Jeevan Aastha and ICICI RGF.. Jeevan Aastha provides 8% assured returns for 10 year term...which are tax free. Give me one FD which provides net 8 % returns for 10 years.. FD provide 10 % returns only for 1-2 years and after 3 years they also provide 8% which are taxable ...so net return in hand is 6.5 - 7.5%.
Secondly, ICICI RGF is available with 10 products from ICICI not only two products mentioned here...even one product name is incorrect...If you invest in ICICI LifeLink product which is single premium...you have allocation charge of 2 % for amount between 1-5 lac and 0% for more than 5 LAc. secondly Policy adm charge is Rs. 840 per year not 6% in LifeLink...
Secondly, NAV of 15 is minimum assurance...If markets performs better, you get higher one...
Other point ELSS mutual fund also come with 2.25 - 2.5 % recucurring expense...have you ever read the offer document...which means if u invest 1 LAc in ELSS for 5 years..they will deduct 2500 per year every year...
Have you compared the returns of Mutual fund and ULIP in last 5 years..please do it...you will find ULIP are much safe in long run and provide better returns....
one more point...please understand every investment, mutual fund and insurance company is in market to make profits...why scare people with the charges..we need to find a plan which has low charges but has the potential for higher returns..I think we don't mind paying 2 % if the returns are more than 12 % ..u still get 10%...
Every plan which is giving returns will have chagres..we have to find a plan which has low charge and provide good returns.
Shyam,
At the outset, I would like to thank you for the article below. Of late, I was planning to get into the "RGF" scheme pushed and lured to me by some ICICI Pru Agent who never spoke of the 20% Premium Allocation Charges. But then he said there is no premium allocation charge for this. When I read the brochure it's written its not applicable for "regular premium" in this policy.
I wonder if this is comes under regular premium.But thanks to you now I am planning for an ELSS mutual fund investment.
But I would like to ask you something, i.e. as they are giving 4 free switches betweens various funds, so wouldn't it be good if after the first premium year with RGF, I switch to "Pension Maximiser" scheme that would allocate my units in the equity market(as said by them) as per the market scenario now???
Sir, I would be glad if you could give me your honest opinion/recos on which ELSS product(brand) would be good to take as per your experience.
Hi Chandra,
I am glad you expressed your views on the article. And then I did not know about "the 1 LAc in ELSS for 5 years" charges. But FYI, the 6% mentioned is for the RGF(not Lifelink) and if premium is 15,000 till 34,999 to be precise. Moreover, you have different premium bands.
What you are saying is for lakhs, for for a novice like me or most of them, this article definitely holds good who would go for 35k till 99,999 band.
ULIPS can be better but as of now ELSS would be a wise option in the long term for better returns as well as tax savings. Because once the market is up, ELSS would give you better returns and ULIPS would give the company better returns(witout over-ruling the idea of self-returns).
Please do some research and let us know which one you think to be better rather than just throwing comments and not giving a commendable solution.
looks like this piece has initiated a vibrant debate already.
Manish:
Just checked your website - you seem to have done quite a bit of research yourself! nice to know that there's another 'Ghost Buster' out there!
Chandra:
I do not agree that ULIPs are safer in the long run! how could that be- afterall they invest your premiums in mutual funds! of course you could have a choice of picking the kind of funds that your ULIP will allocate your money into e.g. Pure Debt, Hybrid Debt & Equity, Pure Equity etc depending upon your risk appetite or "Life Stage" as they call it. If you have experienced lower returns from a mutual fund when compared to your ULIP, you must have picked a safe style for your ULIP's fund (e.g. 50% Debt, large cap only etc..) and a risky style for your mutual fund(e.g. Pure Equity, Mid cap only etc..). Obviously since the markets are in their doldrums, the latter would have lower cumulative returns 'as on date'. Then your finding would be the result of comparing apples to oranges.
This brings me to the second point. That is - no one seems to question how the hell the insurance companies are able to offer principal guarantee or minimum return guarantee!
Well, the guarantee exists for the first premium amount because they would invest your first premium (or entire premium in case of single premium plans) in high yielding debt (mostly AAA corporate bonds) . This means there is not going to be much of an upside (not comparable to equity) even though the ULIP products like RGF use 'the potential upside' as a carrot.
check this link for details on how LIC (and other Guaranteed return schemes) are able to launch these products:
http://economictimes.indiatimes.com/LICs_Jeevan_Aastha_may_collect_record_Rs_8000_cr/articleshow/4014081.cms
Vish:
i guess you are automatically asked to choose where your future premiums should be deployed at the time of applying for RGF (if you are enrolling fresh). So that's not a problem. but the issue I am trying to grapple with in the case of ULIPs is that they go against the basic principles of investment:
When you loose 20% of your premium in the first yr - that's a big hit that would take a long time to catch up with. Even in the later yrs you pay 'premium allocation' or 'policy administration' charges that would chop off 3%-6% p.a atleast for the 1st 5 yrs. This seems to be common phenomenon across annual premium ULIP products (irrespective of which company is offering them). These charges do not exempt you from the fund management fee (for the mutual fund into which your premiums will go). The question if you are anyway going to pay the fund management fee (which you would when you directly invest in these mutual funds), what are the other charges for? They only cripple you by reducing the money you are going to invest , upfront. The basic logic of time value of money says 'money lost today' is worth much more than 'money lost in future'. if you can earn 10% return p.a. by directly investing in a mutual fund, you would have to earn 15% p.a. or more in your ULIP because your investable amount gets reduced (by the charges) even before it can earn money for you! i.e. your money has to work so much harder !
Vardhan , Karthiik, Vish:
I am always hesitant to advice a good mutual fund because there is no fundamental data to base my recommendation on. I can look at their stock holdings in the portfolio but I dont know what that portfolio will look like a month from now. I can look at the fund manager track record but again he/she could quit anytime. same applies to 'track record of returns' or 'star ratings'. they are all so dynamic.
Manish has recommended Sundaram BNP tax saver - I too will vote for them based on my opinion that they are a conservative house. Anything they do they will atleast think about protecting your principal when they make their stock picks.
http://economictimes.indiatimes.com/LICs_Jeevan_Aastha_may_collect_record_Rs_8000_cr/articleshow/4014081.cms
I think it will make more sense if I talk with DATA. Top Performing Mutual fund SBI contra, Reliance Growth, SBI Multiplier has given returns of 26%, 21%, 19% respectively anually during last 5 years.
Top Performing ULIP ICICI Pension Growth, ICICI Lifetime Growth, Kotak Growth has given returns of 27%, 26% and 20% respectively anually during last 5 years.
Data source moneycontrol.com, bajajcapital.com
Secondly, ULIP has attractive switch option. If someone has invested Rs. 10000 in ELSS 2 years ago, Say SBI, current value will be Rs. 8000, If one has invested 1 year ago, current value will be Rs. 4900. You have no control on ELSS. Its goes with market ..as there is lockin of 3 years...you cannot even withdraw.
However, If you are a investor..who knows about the market...you can switch from equity to Debt. When market is at LifeTime high..you can switch to debt so, what ever you had gained from Sensex 10K to 20 K, you can save this by simply switching online. when market is falling..you are safe....Its not always possible to time the market..but everyone was aware that market will fall from Feb 08-Dec08 and even now..but you are helpless in ELSS ..just watching your fund value going down...however if you smart investor..you need to make one switch to Debt fund and your gains are safe.
One thing more, If you are a long term investor like 5 years...preferably 10 years...you will find ULIP are better than ELSS or other mutual fund...If you are in for 3 years....ULIP is not for you.
Hi Shyam,
I found this term policy in BirlaSunLife it might be good option for people who are thinking get some money back
https://www.birlasunlife.com/BirlaSunLife/Insurance/BSLI_MP/BSLI_InsPlans/Individual/Protection/bsl_premiumterm.aspx
Thanks,
but what i can do? alredy invest.
Its not rocket science to find out ULIP is expensive than MF + Term insurance. Investor should not opt for ULIP either for long term or short term ... Expenses are high and no flexibility at all. As
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