ULP: A savings policy with risk advantage

The model of universal life policy (ULP), which is ideally targeted towards the poor (micro-finance), is being replicated by some insurance companies for the urban middle class.

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Globally, ULPs are supposed to give flexibility of payment to policyholders that can help them create a corpus, which, in turn, takes care of their life insurance premium in later years if customers are unable to pay. Also, expenses are the lowest.

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However, Max New York Insurance and Bharti AXA Life Insurance Company have tweaked this basic model by keeping the premium fixed. Also, the entry limit of Max New York's policy is quite high at Rs 15,000.

Premiums have been kept fixed because the Insurance Regulatory and Development Authority (Irda) has not allowed insurers to keep a flexible option. "The regulator has some contentions on the actuarial side. It feels that before the insurance companies are allowed to take variable amounts, there should be certain checks and process that needs to be put in place," said a source from the industry. Irda was unavailable for comments.

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In case of Secured Dreams, the Max New York Life product, the prospective policyholder does not have to go through any medical tests. The maximum sum insured under the policy is only Rs 20 lakh.

Also, one can select a premium amount ranging from Rs 15,000 to Rs 2 lakh. Policyholders can also choose a tenure between 11 years and 20 years. And though the premiums are on a higher side, there are several advantages in terms of costs, accumulation of corpus and death benefits.

After deduction of expenses, the remaining money is transferred to an account where it earns an interest. The rate of interest is decided by the company at the beginning of every quarter. But the company will pay a minimum 3.5 per cent annual interest. The interest is credited to the account on a monthly basis.

Out of the total premium received, 80 per cent is invested in government bonds and the remaining in quality corporate papers. The best part: There are no fund management charges as this is a non-unit linked product. Max New York Life does levy a policy allocation charge (PAC) on the first premium. The company divides the premium in slabs; up to Rs 50,000, PAC is 30 per cent. Any amount beyond this goes directly to the account of the policyholder.

"This product is designed to fulfil a future goal of the policyholder. We provide 10 per cent of the premium as loyalty bonus from fifth year onwards," said Manik Nangia, head, product management, Max New York.

If the policyholder passes away before the term ends, the company pays the premium for the remaining tenure. At maturity, the total amount, which includes the death benefit plus the accumulated corpus, is given to the nominee. "The cost of this is built into the policy expenses. This is why the mortality charges are just few rupees higher than what we charge in the term plan," said Nangia.

Being a non-unit linked product, this policy also enjoys tax benefit under section 10 10(D), apart from the 80C that is applicable to all life insurance premium. This means, the proceeds on maturity are tax-free.

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Experts felt that without the flexibility of payment, policies under universal life are a better version of endowment policy. "These policies will have transparency of charges and added features that are available with unit-linked insurance plans," said Suresh Sadagopan, a certified financial planner.

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