Saving up for the future is a fine thing but making the right investments is even more important, especially when it comes to buying insurance products.

Consider a life insurance plan that earns you an interest on the premium paid every month. Who would not like the product if the insurer promises to pay an interest rate not less than what you earn in a savings bank account along with other guaranteed additions.

Reverse gear

After the stock market crashed last year, the fund value of unit-liked insurance plans (Ulip) got considerably depleted compared with the total premium paid.

Little wonder, life insurers, who have so far been making money hand over fist from Ulips, started selling products that gave a guaranteed minimum return on investments.

Some companies also renewed sales of traditional plans where policyholders get a reversionary bonus as and when the insurer makes profit on investments in its life funds.

The bonus is added to the sum assured of a 'with profits' policy, usually on an annual basis. These bonuses are payable at the death of the policyholder or on maturity of the policy.

Once allocated, their values are guaranteed, provided the premiums are paid up to maturity or death.

New offering

Two companies — Max New York Life and Bharti Axa Life — have recently launched plans offering monthly credit of interest. These plans are called universal life plans (ULPs) and are quite popular in the developed markets of the West.

After Ulips, ULPs could be the new trend in the domestic market.

Almost all private sector life insurance companies depend on their foreign partners for business in India as none of the local entities have any prior experience. And almost all the foreign companies engaged in the life insurance business have significant chunks of their overseas product portfolios in ULPs.

Sooner than later, they will try to bring in these products here too.

ULPs were first introduced in the US in the 1970s amid stagflation — an economic situation marked with stagnation in production and price inflation. The rate of interest in the US skyrocketed to 20 per cent in January 1981.

Amid a slowdown in productivity and rising prices entailing uncertainty in income, people began to look for an alternative investment avenue offering guaranteed returns.

Less flexible

ULPs are like combining a term life insurance with an interest earning savings account. But unlike a Ulip, the policyholder has no flexibility of choosing the investment option in a ULP.

After deducting the cost of insurance (the mortality charges) and other charges from the premium, the remaining amount is invested in a general investment fund managed by the insurer. The insurer announces a rate of interest in advance, a month or a quarter, which is credited to the policyholder's account value.

In a ULP, the insurer often assures paying a minimum rate of interest, irrespective of whether the income from the investment falls short or is more than the guaranteed minimum rate. If the insurer's income from the investment is higher, it announces a higher interest rate to be credited to a policyholder's account.

On maturity of the scheme, the policyholder gets the fund accumulated in his/her account value.

On death, the benefit payable to the nominee of the policyholder varies from insurer to insurer. Some pay both the sum assured plus the account value, while for some the sum assured is higher than the account value.

While the ULPs abroad come with other advantages in terms of flexibility on the premium payment and sum assured, withdrawal and loan from accumulated account value, the products offered by the two Indian companies don’t have these facilities.

In fact, the insurance regulator wanted them to launch fixed premium plans initially to test the market response and introduce variable premium/sum assured later on.

Close view

But are these ULPs really good? Let us analyse this with the help of the current product offerings. Bharti Axa Life's Bachat Bima is a micro insurance product targeted at low-income customers who don't have any insurance coverage.

The maximum monthly premium in Bachat Bima is Rs 499 and maximum annual premium is Rs 6,000. The sum assured is five times the total premium paid. The plan offers no explicit guaranteed interest rate and the death benefit will be higher of the sum assured and account value.

Max New York Life’s Secure Dreams is relatively costly — the minimum annual premium here is Rs 15,000 and the maximum is Rs 2,00,000.

However, for those who are 41-years-old or more, the maximum sum assured is Rs 1,00,000.The sum assured in Secure Dreams is 10 times the annual premium and the plan comes with a guaranteed interest rate of 3.5 per cent.

It means that a 35-year-old healthy man will have to pay an annual premium of Rs 50,000 to get a life cover of Rs 5 lakh.

Let us assume that he buys the Secure Dreams policy for a term of 15 years. At an interest rate of 3.5 per cent, the policyholder will get back an account value of Rs 8,86,266 on maturity, according to the benefit illustration of the policy.

If the same person buys Max New York Life’s 20-year Endowment Plan (with profits), he will have to pay an annual premium of 24,625 for a sum assured of Rs 5 lakh.

Thus, the insurer's traditional endowment plan is much cheaper. If the person deposits Rs 25,375 (= Rs 50,000 - Rs 24,625) every year in a savings bank account, after 15 years he will get Rs 5,02,143 from the bank account.

This is in excess of what he will get as survival benefit from the endowment plan. The plan declares a reversionary bonus after the initial three years of commencement of the policy.

If, instead, the person buys the insurer's Level Term plan, he will have to pay a premium of Rs 1,865 for a sum assured of Rs 5 lakh for a period of 15 years.

However, on survival till the end of 15 years, he will not get anything from the policy.. But if he deposits Rs 48,135 Rs 50,000 - Rs 1,865) in a savings bank account, he will get Rs 9,52,538 after 15 years, which is still Rs 66,272 more than what he may get from the Secure Dream policy.

Guarantees come at a cost. The question, therefore, is whether the excess cost is worth the guarantee?

Insurance is for life risk cover only. If you look at it as an investment vehicle, your money won’t grow much.