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Sunday, March 07, 2010

LIC Wealth Plus Review Analysis


Insurance companies have traditionally offered guarantees on their products through bonuses or loyalty additions. But the market correction of 2008 has opened the gateway for “guaranteed NAV” products under unit-linked insurance plans. These plans typically guarantee the investor the highest NAV (the guarantee is not on returns) on the fund in the initial seven to eight years and manage to deliver this through a hybrid structure that uses debt and equity investments.

LIC's Wealth Plus is the latest entrant to this genre. It guarantees the highest NAV over the first seven years or the NAV at maturity, whichever is higher. The policy term is eight years; life cover to the investor is available for another two years after completion of this term. This plan has a term of eight years compared with the existing products' 10 years. The plan's mandate allows it to invest between 0 and 100 of its portfolio in debt and equity investments, based on market conditions.

Investors should note that in any financial instrument guarantee comes at the cost of returns. Guaranteed NAV ULIPs too fall within this ambit. By switching between debt and equity, these products try and protect the NAV from the sharp corrections in the equity market. However, this requires the manager to maintain either a debt-oriented portfolio with a limited equity exposure or to cut equity exposure, if the stock market starts to fall sharply.

Either strategy will mean that the fund cannot hope to match the high returns of a pure equity or even an equity oriented fund over the long term.

Investors in LIC Wealth Plus should expect returns that are broadly in line with monthly income mutual funds (80 per cent debt: 20 per cent equity) or debt-oriented mutual funds (70:30 allocation).

While the former have managed about a 9 per cent annualised return over five years, the latter managed about 11 per cent (after charging about 1 per cent towards fund management fees).

The returns from the ULIP have to be reckoned after adjusting for charges such as fund management, policy administration charges and the guarantee charge, which IRDA caps at 3 per cent annually.

That would leave unit-holders with comparable yields of about 7 per cent (if equity exposure is limited to 20 per cent) and 9 per cent respectively (after allowing one per cent for fund management fees).

The risk cover arising from the plan may be an additional advantage.

Returns could be higher or lower depending on how the equity markets pan out.

The guaranteed ULIPs launched last year have NAVs that are between 50 and 70 per cent higher, due to their high initial equity allocation and good timing. Such returns may not be easy to repeat under current market conditions.

Let us assume this plan starts with a high equity exposure in the first year and (assuming the stock market rises steadily) manages a 20 per cent return in the first three years. But then it shifts to debt and starts earning 8 per cent for the next five years, the NAV can go up to Rs 25, an annualised return of 12.1 per cent.

The returns in hand will be 9.4 per cent after deducting 2.7 per cent expenses. The product will periodically re-calculate its liabilities, which is equivalent to outstanding units multiplied by maximum NAV recorded till the last trading day of the week.

Assets will be rebalanced regularly to meet this target.

The financial muscle of LIC ensures that it can meet any liability. The fund is also carving out 0.35 per cent of the fund value annually (as a guarantee charge calculated on daily basis) towards this liability. This should also provide comfort for investors.

Investors with adequate risk cover can considered single premium and those without surplus and lesser risk cover can consider regular premium.

For investors, minimum age at entry is 10 years and the maximum is 65 years. The policy holder has to pay premium for the first three years in monthly or annual mode.

Under the annual mode, minimum premium payable is Rs 20,000 and in monthly ECS mode it is Rs 2,000 a month. The plan also offers a single premium option where the minimum payout is Rs 40,000.

In case of death of the policy holder, the nominee will receive the sum assured together with the fund value as a death benefit.

The risk cover allowed is based on the age and premium mode. For a regular premium payment, the minimum is five times the annualised premium and the maximum is 10 times if the age at entry is up to 50 years.

Above this, risk cover is restricted to five times the annual premium. For single premium mode, there are three slabs. If age at entry is 40, five times is the cover. For 41-50, it is 2.5 times, and anything higher entitles the investor to 1.25 times.

The premium allocation charge (PAC) is based on the annual premium. If it is below Rs 2 lakh, the charge will be 12 per cent but it reduces to 11.25 per cent of the premium paid. Under single premium mode, the PAC is 5 per cent up to an investment of Rs 4 lakh, and anything above this attracts 4.5 per cent. The plan pegs its annual fund management charges at one per cent, but it charges 0.35 per cent of the fund value as guarantee charges.

via BL