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SBI life – Smart ULIP

SBI life – Smart ULIP is a investment cum insurance plan.

Smart ULIP is a hybrid of premium guarantee and guaranteed return plan. We will see how it can be better or worse than both premium guarantee and guaranteed return plans. First let us take a look at some key features of the plan.

This plan is divided in four phases:

  • Subscription phase: 12months from launch date, during this time the plan is open for subscription (i.e. new policies can be issued during this time).
  • Premium payment phase: 3/5 years from launch date, during this time the proposer need to pay the premium.
  • NAV build-up phase: 7 years from launch date.
  • Accumulation phase: 10 years from launch date.

Smart ULIP comes with a option of 3 or 5 years premium payment term. This policy comes with a guaranty of maximum NAV recorded at during the first 7 years of policy term. This guaranty is applicable only in maturity benefit. That means if you decide to surrender the policy before the maturity date the guaranty does not apply.

What makes this plan a hybrid of premium guaranty and assured return plan?

A premium guaranty plan promises the maturity amount equal to the total premium paid. In smart ULIP consider a hypothetical senario in which the NAV of the fund starts at 10 and stays somewhere close to 10. This policy will still guaranty that you will get Rs 10 NAV on maturity, but all the  charges that are deducted have been paid from your pockets making your policy worth less than the total premium that you have paid. Thus, this policy does not guaranty the premium paid by you.

This policy guaranties the maximum NAV during the first seven years, but as it does not give any value for of NAV upfront it cannot be called as return guaranty plan.

Different Charges associated with the policy:

  1. Premium allocation charges:
    Deducted as per %age of regular premium:-
    Year 1 : 15%
    Year 2 and 3: 5%
    Year 4 and 5: 5% (if premium is paid)
  2. Policy administration charges:
    Rs 60 per month throughout the term of the policy. Recovered by canceling the units on monthly basis. Additional annual charge of 0.5% of sum assured for the first three years.
  3. Fund management charges:
    About 1.5% per year.

The Maturity date will be 10 years from the start of subscription period. Surrender charges applicable if policy is surrendered withing 5 yrs:
Year 1 : 20 %
Year 2 : 12 %
Year 3 : 9 %
Year 4 : 2 %
No surrender charges after 5 years.

Verdict

  1. Fund allocation charge of 15 % for the first year is quite high.
  2. Fixed sum assured at 5 times of annual premium does not give you a lot of cover but it makes sure that your mortality charges are kept low and you also get maximum tax benefit under 80C and 10(10D).
  3. Minimum premium of 50,000 a month is quite high for small investors.
  4. Premium can be paid only upto 5 years, policy does not give a option of paying top-ups or premium after 5 years.
  5. Lot of flexibility for the fund manager as he can decide to invest 100% in equity or 100% in debt. Because of this we cannot say if the policy is aggressive or safe. Hope, the fund manager is good and knows when to use this flexibility for the investors advantage.
  6. Switching between aggressive and safe fund not available.

My feeling, overall the policy looks good. It is good as an investment, but cannot take care of your insurance needs.

More information about the policy can be found here.

Meta: May 14th, 2009 by Ripul Gupta
Tags:   · · · · · · 5 Comments

Home Loan

Want to take a home loan? You will need to know what questions to ask your loan agent before you finalize on the bank.

Term that you need to understand about home loan:

Prime Lending Rate (PLR): All banks publish their PLR on regular bases. It is the benchmark on which your interest rate is calculated.

Equated Monthly Installment (EMI): This is the monthly installment that you need to pay for repaying your loan.

What is the interest rate at which the banks are giving loans?
Most of the banks do publish their PLR on their site. But most of them don’t publish the rate at which they are currently giving loan. There are some sites like this, that let you get some idea about the interest rates that banks are offering. The best way to find out their interest rate is to go to one of their branch or call a home loan agent.

With which bank does seller have loan?
Most of the banks do not take over sellers loan from another bank. It is always easier and faster to get a loan with the same bank as the seller. In case you decide to go with a bank other than the bank with which the seller has an existing loan, there are two ways of achieving this.

  1. The seller will have to pay off his loan with the pre-closure penalty. Get his property papers released. Then you can apply for loan with any bank. This is not always feasible.
  2. The seller first gets his loan taken over by your bank. Then the bank will transfer the loan to your name.

Both these method take a lot of time.

How much loan is the bank ready to provide?
The amount of loan the bank will be willing to give depends on two things:

  1. Amount of money you earn: Generally banks will give you loan upto the amount for which EMI will be about 50 to 55 % of your gross monthly income.
  2. Registry amount of the house: Generally, Govt. banks will give you 80% of the registry amount as loan. Private banks will be ready to pay you about 85 to 90% of the market value of the house.

How much are the Prepayment charges?
Banks do not like you to prepay the loan. They discourage the prepayment by levying prepayment charges. Prepayment charges can be anywhere between 5% to 2% of the outstanding principal. Some banks let you prepay a part of the outstanding principle without prepayment charges.

How much is the loan processing fees?
Banks will charge you 0.5% or some fix amount for processing the home loan application for you. If you bargain well it is possible to get these charges waived off.

Meta: April 10th, 2009 by admin
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Unit Linked Insurance Plan aka ULIP

Insurance plans are of three kinds: ULIP, Traditional and Term Plans. We will be discussing only ULIP plans in this article.

ULIPs are conceptually same as Mutual Funds. But there are important differences that an investor needs to understand before deciding his investment plan. To know those differences click here.

Unit Linked Insurance Plan, as the name suggests, is a insurance plan plus a investment for future. How do ULIP differ from traditional insurance plan? According to my personal opinion ULIPs are same as traditional plan but with more transparency and also flexibility for the customer.

A typical ULIP plan will insure your life for a sum assured over a certain duration.

Sum Assured: The money that the insurance company guarantees to pay to the nominee, in case of death of the insured person.
Premium: The money that the insured person needs to pay to the insurance company, yearly, for the guarantee of the sum assured during the defined period.
Duration: The time for which the guarantee is valid.

Sum assured could be anywhere between 10 to 100 times of the yearly premium.

How does the premium get invested?
A part of money that you pay as premium is taken by the insurance company as Premium Allocation Charges. These charges may vary between as low as 5% to as high as 70% of the first years premium. The remaining part of the premium is invested, on your behalf, by the company.

The money the company invests is in terms of units. That is, the money is used to buy units of one of the funds run by the company. The price of each unit of a fund is declared by the fund management company on a regular basis. The price at which the units get bought, is the price of the unit on the day, the premium get allocated in your insurance account.

What is fund value and how is it calculated?
Value of your fund, Fund Value, is calculated by multiplying the number of units in your account with the current unit price. Fund value minus exit load, if any, is the amount of money that the insurance company will return when you wish to withdraw your money from your ULIP plan.

What is fund switching? or How can ULIP be used to time the market?
Most of the insurance companies offer their customers, the choice of funds to invest in. These different funds give different kind of risk exposure.

  1. Aggressive funds: mainly put money into equity thus can give good return but come with some risk.
  2. Conservative funds: mainly put money into money market, are safer but give low returns.
  3. Balanced funds: Tries to make a balance between returns and safety.

Most insurance plans allow the client to switch between funds. This allows the client to time to market. Switching between funds need not always be free.

What annual charges are levied by the company and how are they deducted from the fund?
Insurance company deducts mortality charges regularly from your invested fund. Mortality charges is the price that the insurance company charges you to provide you with insurance. This charge is directly proportional to Sum At Risk. Sum at risk is the amount that the insurance company risks paying the nominee, from its own pocket, in case of death of the insured person. Sum at risk is generally calculated by subtracting fund value from sum assured. Mortality charges also increase with the increase in age of the insured person.

Administrative charges, which are generally 5% per year, are also deducted from the fund.

Both administrative charges and mortality charges are deducted in terms of units. Number of units to be deducted is decided by dividing the amount to be deducted by the NAV of the unit.

What are tax benefits of investing in ULIPs?
The amount of premium paid, not more than 20% of the insured amount, can be considered under 80C. If the annual premium is less than 20% of sum assured, the returns from the ULIP plan are also tax free.

This article contains very basic information about ULIPs. If you find anything wrong or missing please feel free to comment on the article, we will try to accommodate it.

Meta: April 10th, 2009 by admin
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Where has all the money gone?

I got inspired to write this because of the question posted by a friend.

Joju says “Everywhere we see news and discussions about economic slowdown and credit crunch. Analysts say nobody (no banks, mutual funds, general public etc) has enough liquidity. Where have all the money disappeared?”

I would like to share my understanding here with a hypothetical example.

There is a lot of virtual money in the market. This money is only in the books of account and is not physically present. Let us, for example, look at a simple make believe world. This world has only 4 people. One Mr. A, who to start with, has all the money, say $100. One Mr. B has all the land. One Mr. C is a working professional. One Mr. Banker runs a bank.

Mr. A deposits the money that he has in the bank. So bank has deposits worth $100. Bank will be giving interest on the deposited money to Mr. A. So it needs to use this money to make more money. Mr. C wants to buy a house but does not have the money. He goes to the bank and the bank lends $75 to him on interest. Mr. C uses this money to buy the house from Mr. B. Now, Mr. B (the house seller) goes and deposits this money into the bank.

Now, the bank is having $175 as deposits in the Books of Accounts. But note that the world started with only $100. Where has this extra $75 come from? The total money in this world is $100 cash + $75 as a house. Thus, we can say that the total money, is not only the real money but also the assets valued in terms of money.

The bank has $175 deposits as its liability. It has an asset of $75 as loan and $100 as cash. So, by accounting standard, there is no issue as the bank has enough assets to match its liabilities. But, if we take a closer look, we can see that some of the assets that the bank has, if needed, cannot be converted to cash instantly. Thus the liquidity is missing.

If the interest rate falls, or due to any other reason, both Mr A and Mr. B might want the bank to return their money. But the bank does not have that much money as it hold real as well as virtual money. Real money is the $100 as cash that it can return and the virtual money is the assert in form of $75 loan which is not liquid. Thus, leading bank to liquidity problem.

On casual observation, we might feel that $75 though being present in the Books, have suddenly disappeared from the real world.

Meta: October 16th, 2008 by admin
Tags: 8 Comments