A super insurance plan from ICICI Prudential

ICICI Prudential's best selling unit linked insurance plan, Life Time Super, is one of the oldest ULIPs to hit the market. It was launched in November 2001. It was called Life Time Plan in its earlier avatar and was later re-introduced into the market as Life Time Super, in accordance with the latest IRDA guidelines.

The policy

Life Time Super comes only with a regular premium option, the minimum being Rs 18,000, that can be paid monthly, half-yearly or yearly. A newborn to a 75-year-old can avail of this policy with the term varying from 10 to 75 years. The life cover, the main reason for buying an insurance policy, is a function of the premium amount, the minimum being Rs 100,000 or double the yearly premium (whichever is higher). The maximum cover is decided by the company on a case-to-case basis.

Once you choose the amount of cover, which should ideally be seven to 10 times your annual income, you now need to decide on what path your investment will take. This being a bundled product that combines a life cover along with an investment function, it is important to look at the kind of financial products your money will buy. If you prefer fixed deposits and not stocks, you need to understand the four plans of this policy.

After deducting premium allocation charges and mortality charges, the remaining amount is routed into one of the funds of your choice. Maximiser is a high-risk plan that invests minimum Rs 75 out of Rs 100 and maximum, the entire amount, in the stock market. Balancer is a medium-risk plan that invests a minimum of Rs 60 out of Rs 100 in the stock market and the rest in safer bonds.

Protector is a low-risk plan that invests the entire amount in bonds, government securities and cash markets. For those who prefer absolutely zero-risk investments, there is the Preserver plan that aims to protect every rupee of your Rs 100 - growth may or may not come.

You are rewarded for paying premiums regularly with 4 per cent of the annual premium amount getting added to the fund every fourth year, as additional units. Other features include optional riders for accident and disability, critical illness and a waiver of premium.

The waiver of premium benefit rider is useful because if you are disabled permanently due to an accident, the remaining premiums for the policy term will be paid by the company itself.

There is also a settlement benefit option where you can receive the maturity benefit funds periodically for five years after the end of the policy (See: Benefits, Options Available). Optional benefits like critical illness, accident and disability riders are charged by cancelling the units of your policy.

However, these optional benefits will be terminated once the policyholder makes a claim. If you are unable to pay premium at any stage after the first three years of the policy, the option of cover continuance ensures life insurance cover for a maximum of two years.

The costs

In the first year, Rs 20 out of every Rs 100 goes as agent's commission, on a policy with a premium of less than Rs 50,000. This charge decreases to 18 per cent for premiums of Rs 50,000 and more.

Commission costs come down to 7.5 per cent in year two and 4 per cent per year from the third year onwards. The life cover in the policy has a cost, which comes through the mortality charge, which is the difference of the fund value and life cover offered.

For example, if the life insurance cover is Rs 500,000, and the fund value is Rs 50,000, then mortality charges are charged on Rs 4500,000, which would be around Rs 680. This is almost at par with the Rs 653 that SBI charges for its ULIP in its first year as a mortality charge for a similar sum assured. Once the value of your investment is equal to your insurance cover, the mortality cost goes down to zero. There are no policy administrative charges in this policy.

The third charge depends on the plan you choose. It is the cost of managing your money, much like what a portfolio manager or a mutual fund would charge. At the end of every year 2.25 per cent of the corpus will be charged for Maximiser and Balancer plans, 1.5 per cent for Protector and 0.75 per cent for Preserver.

For example, if the fund grows at 10 per cent for a Rs 50,000-a-year premium policy with Rs 5 lakh cover, all charges added up will be Rs 10,668 or 24.60 per cent in the first year, Rs 6,566 or 6.86 per in the second year, and so on for the Maximiser plan. The total charges in year 20 will be Rs 52,932, due to the size of the fund, but in percentage terms, it will be just 2.39 per cent. So costs come down over the long term (See table below).

Charges of critical illness benefit for a 30 year old is Rs 228 for Rs 200,000 cover. A flat rate of 90 paise per Rs 1,000 is charged irrespective of your age, for accident and disability benefit, which comes to Rs 180 for Rs 200,000 cover.

Charges for waiver of premium benefit are calculated according to the age of the policyholder and term of the policy. Typically, these charges are Rs 8,000 for a 30-year old person for a policy term of 20 years.

The returns

Any investment decision needs to be based on the kind of returns the product offers. One indication of future returns is past performance. We find that three of the four plans of this policy have underperformed the benchmarks used by the company, over the past two years. It is important to look at benchmark returns to see how well your fund is doing.

A return of 40 per cent in a market giving 50 per cent is poor performance. Maximiser, which is benchmarked to BSE 100, returned 43.61 per cent per year whereas the benchmarks gave a higher return of 45.51 per cent for the last two years, as on 31 August 2006.

Balancer, which is equally invested into equities and debt, had an annualised growth of 17.36 per cent against its benchmark's 17.60 per cent. Protector and Preserver, which are dominantly in debt and money market instruments, have grown 3.92 per cent, 5.76 per cent per year in the last two years, against benchmarks' 4.01 per cent and 5 per cent.

Annualised growth rates since inception of these funds are 32.81 per cent, 17.50 per cent, 8.14 per cent, 5.51 per cent for Maximiser, Balancer, Protector and Preserver, respectively. Cumulative annual growth rates, which can be termed as real returns, are 7 per cent for a illustrative growth of 10 per cent and 2 per cent for an illustrative growth of 5 per cent over 20 years for this policy.

What you should do

Bundling of life cover with investment works only if you are unable to systematically invest your money. But even for those who cannot, the fund performance of this policy is below par. And while it is true that future performance is not dependant on past record that is the only benchmarks we have to judge the policy. So though costs come down over time, it is falling below the benchmarks that makes the policy look not super at all.