Description
Cost Effective Alternative to ULIP
Lifestyle Wraps: A Cost Effective Alternative to ULIP
Sunder Ram Korivi Venkatesh BS
Background: India
• • • • • • • • One billion population Large market for insurance products Large market for investment products Lack of product knowledge by consumers Mixing up insurance and investments Malpractices in insurance selling High levels of fees and commissions High levels of policy lapses, < 3 years
Unit-Linked Insurance Plans ULIP
• • • • • • • • Extremely popular product 60% of premium collections Unhealthy competition High Management Fees High Commission Structure Lack of complete product knowledge Both customers and sellers ignorant Costs and Benefits not transparent
ULIP Features
• • • • • • • • • Bundling Insurance + Investment Protection + Capital Appreciation Uniform Premium Composite Premium Amount Regularity in Premium assumed Tax Break on Premiums paid Insurance Cover top-up facility Investment choice + switching facility Convenience is the key word
ULIP Mis-selling
• • • • • • • 30% tax break disguised as return Agents dub this as a guaranteed return Overplay of the convenience angle Overplay of flexibility options Underplay costs and commissions Overplay ‘forced savings’ benefits Unhealthy Competition among Insurers
ULIP versus Term Insurance
• Premiums (up to) 9 times higher • Higher Commissions to Agents • Lack of clarity on consumers’ benefits
ULIP versus Index Fund
• • • • • • • • ULIP uses residual premium for Investing ULIP: High management fees: 9 types Index Fund fees regulated Down to 0.5%, since passive strategy High transparency, daily NAV Painful (ULIP) versus profitable (IF) exit No errors in investment choice under IF No discontinuation penalty under IF. Flexible.
ULIP Management Fees
• • • • • • • • • Premium Allocation Charge Fund Management Charge Policy Administration Charge Surrender Charge Switching Charge Mortality Charge Rider Premium Charge Partial Withdrawal Charge Miscellaneous Charges
ULIP Disadvantages
• • • • • Bundling works against investor Feature fatigue Excessive costs Need for alternatives Intervention by IRDA
Stand-alone Term Insurance + Investment
• • • • • • Term Policy: Cheap and efficient cover Top up in modular fashion: no limit Scale up based on insured’s convenience Low costs, low premiums Policy benefits clear to nominee Tax benefits intact
Investment Wraps
• • • • • • Term policy premiums are cheaper Thus, higher residuals for investment Minimize transaction costs Minimize transaction fees Buy and hold strategy Time diversification
Wrap Alternatives
• • • • • Bonds (rule of 72), lock returns Index funds (Graham, Bogle) Stocks for the long run (Siegel) Focused Portfolio (Buffet) Stock Picking (Lynch)
Index Fund LIC Mutual Fund
• NIFTY INDEX fund launched recently • Face value Rs.10 per unit • An investment of Rs.10,000 in the bearish phases between March 2006 to April 2007 is worth Rs.11,516 in July 2007 • Load is reduced from 2.5 % to 0.5% • Over a 10-year horizon, performance could be more impressive • Buying in bear phases fetches more units • Depressed market investment plan (DIP)
Shares in PSU
• • • • • • • Public Sector Units Government owned, sovereign risk quality Professionally managed Monopolies Utilities, Infrastructure Regular dividends, Rapid growth Fortune 500 companies
PSU list Blue Chip Stocks
• • • • • • • • • • • Bharat Earth Movers Bharat Heavy Electrical Container Corporation Dredging Corporation Gas Authority of India Maruti Udyog National Aluminum National Thermal Power Corporation Power Finance Corporation Steel Authority Shipping Corporation of India
Conclusion
• Need for reduction of excessive management fees • Transparency and efficiency to be maintained and enhanced • Stand alone term insurance leave a higher residual for investment • Passive index fund investment on dips • HTM strategy for bonds, Rule of 72 • Time diversification for lifestyle cash flows
Investment Philosophy
• The methods outlined are in tune with those advocated by Benjamin Graham and John Bogle
Thank You
doc_237504333.ppt
Cost Effective Alternative to ULIP
Lifestyle Wraps: A Cost Effective Alternative to ULIP
Sunder Ram Korivi Venkatesh BS
Background: India
• • • • • • • • One billion population Large market for insurance products Large market for investment products Lack of product knowledge by consumers Mixing up insurance and investments Malpractices in insurance selling High levels of fees and commissions High levels of policy lapses, < 3 years
Unit-Linked Insurance Plans ULIP
• • • • • • • • Extremely popular product 60% of premium collections Unhealthy competition High Management Fees High Commission Structure Lack of complete product knowledge Both customers and sellers ignorant Costs and Benefits not transparent
ULIP Features
• • • • • • • • • Bundling Insurance + Investment Protection + Capital Appreciation Uniform Premium Composite Premium Amount Regularity in Premium assumed Tax Break on Premiums paid Insurance Cover top-up facility Investment choice + switching facility Convenience is the key word
ULIP Mis-selling
• • • • • • • 30% tax break disguised as return Agents dub this as a guaranteed return Overplay of the convenience angle Overplay of flexibility options Underplay costs and commissions Overplay ‘forced savings’ benefits Unhealthy Competition among Insurers
ULIP versus Term Insurance
• Premiums (up to) 9 times higher • Higher Commissions to Agents • Lack of clarity on consumers’ benefits
ULIP versus Index Fund
• • • • • • • • ULIP uses residual premium for Investing ULIP: High management fees: 9 types Index Fund fees regulated Down to 0.5%, since passive strategy High transparency, daily NAV Painful (ULIP) versus profitable (IF) exit No errors in investment choice under IF No discontinuation penalty under IF. Flexible.
ULIP Management Fees
• • • • • • • • • Premium Allocation Charge Fund Management Charge Policy Administration Charge Surrender Charge Switching Charge Mortality Charge Rider Premium Charge Partial Withdrawal Charge Miscellaneous Charges
ULIP Disadvantages
• • • • • Bundling works against investor Feature fatigue Excessive costs Need for alternatives Intervention by IRDA
Stand-alone Term Insurance + Investment
• • • • • • Term Policy: Cheap and efficient cover Top up in modular fashion: no limit Scale up based on insured’s convenience Low costs, low premiums Policy benefits clear to nominee Tax benefits intact
Investment Wraps
• • • • • • Term policy premiums are cheaper Thus, higher residuals for investment Minimize transaction costs Minimize transaction fees Buy and hold strategy Time diversification
Wrap Alternatives
• • • • • Bonds (rule of 72), lock returns Index funds (Graham, Bogle) Stocks for the long run (Siegel) Focused Portfolio (Buffet) Stock Picking (Lynch)
Index Fund LIC Mutual Fund
• NIFTY INDEX fund launched recently • Face value Rs.10 per unit • An investment of Rs.10,000 in the bearish phases between March 2006 to April 2007 is worth Rs.11,516 in July 2007 • Load is reduced from 2.5 % to 0.5% • Over a 10-year horizon, performance could be more impressive • Buying in bear phases fetches more units • Depressed market investment plan (DIP)
Shares in PSU
• • • • • • • Public Sector Units Government owned, sovereign risk quality Professionally managed Monopolies Utilities, Infrastructure Regular dividends, Rapid growth Fortune 500 companies
PSU list Blue Chip Stocks
• • • • • • • • • • • Bharat Earth Movers Bharat Heavy Electrical Container Corporation Dredging Corporation Gas Authority of India Maruti Udyog National Aluminum National Thermal Power Corporation Power Finance Corporation Steel Authority Shipping Corporation of India
Conclusion
• Need for reduction of excessive management fees • Transparency and efficiency to be maintained and enhanced • Stand alone term insurance leave a higher residual for investment • Passive index fund investment on dips • HTM strategy for bonds, Rule of 72 • Time diversification for lifestyle cash flows
Investment Philosophy
• The methods outlined are in tune with those advocated by Benjamin Graham and John Bogle
Thank You
doc_237504333.ppt