UTI ULIP Review

by Manshu on July 2, 2012

in Investments

UTI ULIP is the only ULIP run by a mutual fund company in India, which is interesting because for insurance cover they pay LIC and then get you under a group insurance cover from LIC.

They also say it is the lowest cost ULIP, and while I’m not sure if this is the lowest cost or not, the costs do seem to be lower than most other ULIPs.

Like any ULIP plan, this has got an insurance component and an investment component, and as far as maturity goes, you can opt for the 10 year plan or the 15 year plan.

This also seems to be structured differently from other plans, and it took me quite a while to figure out the terminology used, and let’s start with the harder part first, which is the insurance component.

UTI ULIP Insurance Component

The plan has two terms of either 10 years or 15 years and you have to select either of these two terms first.

Then you have to select what they’re calling a “Target Amount”. The target amount is the money that you will pay UTI over the course of this policy.

So, if you choose a target amount of Rs. 15 lakhs for a 10 year policy, you will pay them a premium of Rs. 1.5 lakhs every year.

This target amount becomes your life insurance cover, and there are two types of life insurance covers that you can opt for.

  • Declining Term Insurance
  • Fixed Life Insurance

Declining Term Insurance

This is the first time I’ve heard of a declining term insurance and a little Googling reveals that this is a type of insurance that people take out to cover mortgage payments whose outstanding balance reduces as time goes by. So, you need lesser and lesser insurance every year to cover that payment.

Now, let’s see how this works or at least my understanding of how this works.

In our example, since your target amount is Rs. 15 lakhs, that’s your insurance cover and you pay Rs. 1.5 lakhs every year for 10 years.

Your insurance amount is what you haven’t paid to them yet. So, if you paid two years worth of installments which equal Rs. 3 lakhs then your insurance cover is Rs. 12 lakhs.

If you have done a SIP with them where you pay monthly installments; to calculate the unpaid amount they say that if you have paid 15 installments then they will consider that you have paid two years worth of installments which is obviously unfair to you.

Nothing is payable on death within 6 months of buying the policy.

You only get half of what’s due if death occurs between 6 and 12 months of taking the policy.

This would have made some sense if the premium charged in this case were less than the premium for fixed cover but that’s not the case so either this doesn’t make any sense at all or I have not understood this correctly. If you think I haven’t understood this correctly then I’ll much appreciate if you leave a comment explaining it the right way.

I’ve based what I say on their document and this is the relevant extract on page 23.

Under Declining Term Insurance Cover: Life insurance cover is to the extent of the unpaid but not due amount of the chosen target amount as applicable for the yearly instalment payment. No life insurance cover is payable in case of death less than 6 months from the commencement of membership. For 6 months and above but less than 1 year the life insurance cover is 50% of the target amount unpaid but not due. For example for target amount of `120,000/ – under the 10 year plan, the yearly instalment due is `12,000/ – and the unitholder has died after paying only `7000/ – (7 monthly instalments) the Life Insurance Cover payable is 50% of `120,000/ – less `12,000/ – i.e. `54,000/ – and not `56,500/ – (50% of `120000/ – less `7000/-). For 1 year and above 100% of the target amount unpaid but not due is payable. For example under the 10 year Plan for a target amount of `1,20,000/ – in case a unitholder dies after paying 15 instalments (`15000/-) the life insurance cover payable is `1,20,000/ – less `24,000/ – i.e. `96000/-).
Under Fixed Term Insurance Cover: No life insurance cover is payable in case of death less than 6 months from the commencement of membership. For 6 months and above but less than 1 year the life insurance cover is 50% of the target amount. For 1 year and above 100% of the target amount is payable.

Fixed Term Cover

The fixed term cover works like the regular term plan where your target amount becomes your insurance premium and you get that paid upon death.

The conditions that exist for the 6 months and one year period that is no insurance money to be paid out if death is within six months of taking cover and only half of the insurance to be paid out if death is between 6 months and a year is also applicable in this case.

The table for rates shows that for a 31 year old the premium is Rs. 1.30 per Rs. 1,000 sum assured and that rate looks quite less to me because you need to pay that for only 7 years and a Rs. 5 lakh cover based on that comes out to just Rs. 650 per year and that’s even lesser than comparable term plans. I’m not certain what’s going on in here as well.

Covered under Section 80C

This plan is covered under the Section 80C tax saving scheme so at least till the time DTC is not implemented you will benefit from the tax benefits.. There have been several changes in DTC and it won’t be surprising if the final draft allows some sort of tax saving schemes but at this point it is better to assume that they won’t allow any tax saving schemes since they have never said that they will do that anyway.

UTI ULIP Investment Component

The investment part of this ULIP will invest in a debt oriented scheme which can invest up to a maximum of 40% in equity products.

This is a reasonably big fund with Rs. 2,322 crores under management and this fund has done quite well over the years and Business Line had an invest recommendation in it last year. The fund page shows that it has returned 10.87% since inception, 3.88% in 2011-12, 8.81% in 2010-11 and 35.87% in 2009-10, which are fairly good numbers. The plan doesn’t pay out any dividend as they re-invest the amount back in the fund.

Maturity Bonus

There is a maturity bonus where you get 5% of the target amount on the maturity of a 10 year plan, and 7.5% of the target amount on the maturity of a 15 year plan.

Conclusion

Of all the ULIPs I’ve reviewed here, this one seems the best because of the low cost and good fund performance. However it was a bit confusing to go through all the terminology used and I don’t feel confident that I’ve understood everything correctly, so if I were to buy this I would first seek out someone who has already bought this fund and ask some questions or someone who is familiar with what it is that makes this fund low cost and still profitable enough for UTI to run it.

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