A Ulip that has lower costs and can work as a child plan
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Edelweiss Tokio Life Wealth Plus is a unit-linked insurance plan (Ulip) by Edelweiss Tokio Life and offers the option of a child plan. It boasts zero costs, other than those levied for fund management, insurance and premature surrenders. Here is more about this plan.
What do you get?
From an insurance perspective, this is a type-1 Ulip: on death of the policyholder during policy term, insurer pays higher of the fund value or the insurance cover subject to a minimum of 105% of the premiums paid. Sum assured is 10 times the annual premium. But if you choose the Rising Star option, which works like a child plan, the insurance benefits differ.
Here, policyholder is the parent and life insured is the child. If policyholder dies, the child gets a lump sum that is a multiple of the annual premium—decided by the age at which the plan was bought: if between 18 and 40 years, the multiple is 10 times annual premium; till 44, it reduces to 9 times and so on. The idea is to keep mortality costs low while preserving tax efficiency. After the lump sum is paid, insurer invests the remaining premiums on behalf of the policyholder and maturity benefits accrue as planned. The life insurance continues on the child. “In a typical child plan, premiums are invested as and when premiums are due. In this plan, all the premiums are invested upfront, which gives the advantage of compounding,” said Deepak Mittal, MD and CEO, Edelweiss Tokio Life Insurance Co. Ltd.
For investment, there are five funds to choose from: three equity, one balanced, and one debt fund. You can choose on your own or take the lifecycle-based approach, where equity allocation tapers as you age and get closer to policy maturity. The policy also offers extra allocations: if you pay premiums regularly for first 5 years, the policy invests 1% of the premium to the fund each year. From the 6th policy anniversary onwards, this allocation increases and goes up to 7% of the premium by the 16th policy year till the 20th year. “Most Ulips start loyalty benefits after one stays invested some years. In our plan, this extra allocation starts right from the first year so the policyholders can benefit from compounding,” added Mittal.
How much do you pay?
Under a typical Ulip, you pay a premium allocation charge that is deducted from the premium you pay. The money then gets invested in your choice of funds. But there are three other charges: policy administration charge, cost of insurance and fund management costs; which get deducted from the fund value on a regular basis. In this plan, there is no premium allocation charge or policy administration cost.
So you only pay a fund management charge, which is 1.35% for equity and balanced funds and 1.25% for debt fund. Then, depending on factors such as your age and sum assured, you also pay an insurance charge that decreases as the fund value goes up, as it’s a type-1 plan. If a 35-year-old buys this plan for a term of 20 years and an annual premium of Rs1.2 lakh, without the child option, the sum assured will be about Rs12 lakh. At an 8% return, the policyholder will get Rs49.70 lakh. This is a net return of 6.51%.
Should you buy?
Cost wise the plan is competitive. What gives Ulips an added advantage is that maturity proceeds are tax free—for other equity products like mutual funds, the proceeds are subject to long term capital gain tax after 1 year from next financial year. “But people shouldn’t just buy Ulips because of the tax advantage,” said Suresh Sadaopan, a Mumbai-based financial planner. “One needs to understand the limitations of the product. For instance, it is bundled with insurance so you pay for a cover you may not need. Also, it has concentration risk because if you want to invest in, say a large-cap fund, most likely there will only be one large-cap fund in the Ulip,” he added. Make sure you understand the plan properly before investing.