Source: Equitymaster
Unit linked insurance plans (ULIPs) have been zooming up on the popularity charts with insurance seekers. ULIPs are life insurance plans whose returns are linked to the stock markets. So ULIP returns fluctuate with the ups and downs in the stock market. Given this scenario, there exists a category of ULIPs, which guarantees to give back (at least) the premiums to policyholders, irrespective of the market swings. These plans are called capital guarantee plans.
Simply put, capital guarantee life insurance plans are unit linked plans that ‘promise’ to return at least the premium paid by the individual on maturity. This is in case the policy’s maturity value is below the total premium paid by the individual till maturity. This ‘promise’ is made keeping the market vagaries in perspective.
However, one thing individuals need to understand is that the capital guarantee is not on the actual annual premium paid by the individual. It is on that portion of the premium, which is net of expenses (like mortality, sales and marketing, administration) plus declared bonuses (if any). Capital guarantee ULIPs have an expense structure that is similar to regular ULIPs with a comparable equity allocation.
An illustration will help in understanding how capital guarantee ULIPs work.
| Age (Yrs) | Sum Assured (Rs) | Annual Premium (Rs) | Tenure (Yrs) | Guaranteed Maturity Amount (Rs) |
| 30 | 400,000 | 12,000 | 30 | 287,000 |
Let us take a 30-Yr individual who has opted for a ULIP with a capital guarantee for a 30-year tenure for a sum assured of Rs 400,000. The premium for the same is Rs 12,000. Over a period of 30 years, the total premium paid works out to Rs 360,000. From this figure, expenses (as applicable) are deducted and the net premium (plus bonuses as applicable), are payable to the individual on maturity. That is of course, assuming that the actual maturity value is lower than the ‘guaranteed amount’. In our example, the guaranteed amount works out to approximately Rs 287,000.
Capital guarantee ULIPs invest a portion of their money in equities. Though the exact percentage varies across companies, it is usually in the 25%-30% range. The remaining 70%-75% is invested in debt instruments like bonds and gsecs. The higher debt portion helps in capital preservation, while the equity component provides a kicker to the overall returns of the ULIP portfolio. Investors who are aware of the asset allocation in a mutual fund monthly income plan (MIP), will relate to the asset allocation in a ULIP capital guarantee.
However, ‘capital guarantee’ should not be ‘the’ reason for buying such products. The capital guarantee simply acts as a salvage act in a worst-case scenario. Several studies have established that equities are better equipped to deliver above average returns over the long term as compared to fixed income instruments like bonds and gsecs.
Another factor which should be given due weightage is the fact that generally capital guarantee ULIPs can invest upto 30% of their monies in equities. Individuals should be aware of this fact in addition to the expenses structure before zeroing in on this product. It should make for a good fit in the risk averse individual’s financial and insurance portfolio considering his overall investments in equities.