Layman's analysis of an ULIP : Bajaj Allianz Future Gain

Recently a friend of mine asked me whether he should choose to invest in a Mutual Fund or this ULIP named Bajaj Allianz Future Gain. The ULIP salesman have apparently been pestering him a lot to invest in that scheme while I had strongly suggested him to not go with any ULIP at all. In my books ULIPs have a blanket ban. My friend Prabhakar Kudva and Dhirendra Kumar of valueresearchonline.com have given me enough information to realize that combining investment and insurance is not a good idea and ULIPs in India are definitely very bad investment options for almost all.

valueresearchonline.com had been a regular critic of ULIPs back  in 2000s when ULIPs had a free run without any check. In those days ULIPs charged insane charges like 25% to 30% and have literally scammed investors. After a lot of noise was made about this, IRDA finally woke up and put in some nominal rules to regulate this kind of practice. It however left a huge holes in the policy for these insurance companies to exploit. Insurance companies are not so closely watched as the Mutual Fund companies are watched by SEBI and transparency requirements are also lower for insurance companies. As a result ULIPs become very risky options for investors because of the exploitation possibility.

Anyways that was the history. Despite all this gyaan, my friend however wanted me to take a specific look at this particular ULIP - Bajaj Allianz Future Gain.

So I tried to do a quantitative analysis of the same to demonstrate how bad an investment option it is.

NOTE : Professionally I am an engineer and finance is just a hobby for me. So calculations below are as per my understanding and hence should not be taken as serious financial advise.

Bajan Allianz Future Gain plan facts (Source : http://www.bajajallianz.com/Corp/content/endowment/future-gain-web.pdf)

Minimum premium : 25,000/- Yearly
Minimum sum assured : 2,50,000/- (10 * annual premium)
Minimum Policy term : 10 years
Minimum Premium paying term : 5 years
Lock in period : 5 years

Premium allocation charge :
1st year : 5.5.% of Annual premium = 1,375/-
2nd - 5th year : 3.75% of Annual premium = 937.5/- per year. (3,750/- for 4 years)

Average yearly charge = (1375 + 3750) / 5 = 1025

Yearly charges so far = 1,025/-

Policy administration charge :
33.33/- per month increasing at 5% p.a. every month
Assuming this 5% is compunded every month at the end of 5 years this value will be 42.77.
So for the sake of simplification let us take the average of starting and ending value as the monthly dedudction

Average monthly dedudction = (33.33 + 42.77) / 2 = 38.05 =~ 38/-

Yearly policy administration charges = 38 * 12 = 456/-

Yearly charges so far = 1,481/

Mortality charge :
For a person aged 30, charge = 1.34 per thousand sum at risk (Deducted at monthly anniversary a.k.a every month)

Sum at risk = Maximum of [death benefit – regular premium fund value - top up premium fund value, zero]
Death benefit = 2,50,500/-
Regular Premium Fund value will keep changing depending the fund performance.

At beginning for first year = (First premium - charges) = 25,000 - 1481 = 23,519
So sum at risk = 2,50,000 - 23,519 = 226481/-
Mortality charge = 227 * 1.34 = 304

Yearly charges so far = 1,785/-

NOTE : The mortality charges will decrease as you pay more premium and also as the fund gains more value. But to keep things simple taking an average value is acceptable for this calculation and to illustrate the point that ULIPs are not really good options.

So for a yearly premium of 1,785/- you get a life cover of 2,50,000/- for 5 years (assuming you do not want to pay a premium after the mandatory 5 years)

Now consider the Anmol Jeevan - II (822) term plan from LIC.
For a yearly premium of 1,617/- you get a life cover of 7,00,000/- for 5 years (Source : https://www.licindia.in/premium_calculator.htm)

So wouldn't it make sense to separate out investment and insurance? For insurance take a plain term plan and for investment choose a decent ELSS scheme. This way your investment will perform much better and you will also have a much better insurance life cover.