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Same old advice: Avoid hybrid insurance plans

Kolkata-based Prakriti Ojhaâ??s insurance agent called her last week to inform about a new, safe product giving assured returns, called a universal life plan (ULP). The 25-year-old is excited about the product, which guarantees returns with insurance.But financial planners are not. Their argument: ULPs are a combination of traditional endowment plans and unit-linked insurance plans (Ulips), leading to high cost with limited returns.

When Ulips invested in equities, one took five-six years to recover his/her money. When will I recover my money by investing in debt products? This is worse than Ulips,â? said Katik Jhaveri, director, Transcend Consulting. Financial planners reiterate term plans are the best option for insurance needs and one should save through pure investment products.In the past few months, insurers are focusing on such hybrid products as ULPs because the Insurance Regulatory and Development Authority has tightened norms for Ulips, making them less lucrative for companies. â??With increasing pricing pressures on Ulips, both distributors and insurers are finding that pushing traditional plans and ULPs is safer, as well as bankable. In fact, many companies who do not have ULPs in their portfolio are likely to introduce them soon,â? said an executive of a life insurance company.

An ULP functions like a Ulip in terms of costs, while it invests like a traditional plan.As ULPs are fixed income-based products, returns are not market-linked. The sum assured is also not very high. The two existing products â?? Max New York Life Secure Dreams and Reliance Life Investment Insurance Plan â?? offer a sum assured of 10-20 times and seven-and-a-half times the first-year premium, respectively.The insurance company declares an interest rate, called declared interest credit to your account value (or fund value in case of Ulips). Ulips being market-related, the returns are not specified.

The declared interest credit is generally a function of returns from the fund managerâ??s fixed income products, which are mostly government securities and highly rated corporate papers.Also, there is a minimum guaranteed rate. â??The minimum guaranteed value is the lowest possible rate of interest or return the insurance company commits to pay on your investmentsâ? said Manik Nangia, senior vice-president & head (product management), Max New York Life Insurance. At present, Max New York Life Insurance was paying 6.5 per cent annually, he added. However, this rate is subject to revision. This rate cannot fall below the savings bank account rate of 3.5 per cent. However, financial planners say fixed deposits (FDs), public provident fund and AAA-rated corporate FDs are better paying options compared to ULPsâ?? guaranteed return of 3.5 per cent.As for the term policy, insurance companies declare bonuses on ULPs on a regular basis, mostly quarterly. Additional rider benefits are also available with ULPs, for an extra premium.

This entry was posted on Monday, August 2nd, 2010 at 11:30 am and is filed under Florida Life Insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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