Birla Sun Life Foresight Plan: Costs increases as the Guarantees increases

It has been said umpteen numbers of times not to mix the insurance and investment aspects.  To maximize gains, one should purchase the cheapest insurance option (read term insurance) and should invest the balance funds optimally.  However, Indians always like to mix insurance with investment and insurance companies are known for capitalizing on this tendency.  Add a tax flavor and we feel it is a great investment opportunity.

Birla Sun Life Foresight Plan is one such plan which has been recently launched and gives the combined benefit of insurance and opportunity to invest.  It is a ULIP plan with unique guarantees on investment.  It comes under two options: Self Managed and Guaranteed Option.  

Self Managed option is similar to any other ULIP plans wherein your premium amount after deducting all charges is invested in the market.  However, unlike other ULIPs, the plan provides 10 options to choose from for investment.  The option ranges from choosing 100% investment in equities to 100% in debt instruments.  Depending on the option one chooses, the net premium will get invested.

The other option is Guaranteed Option and needs to be properly understood before opting.  This option is available only if one chooses the 5 year premium payment term.

We have heard a lot about guaranteed NAV funds which promises to give the highest NAV achieve during initial 5 to 8 years of the policy term, irrespective of the fund value at the time of maturity.  Birla Sun Life Foresight Plan’s Guaranteed Option provides that benefit along with an additional guarantee.  It also guarantees that the premium is invested on the best day of the year, irrespective of the actual date of payment of premium.  For eg:  Suppose the fund value during the start of the year is Rs. 1,00,000,  the day you paid your premium, it was Rs. 1,05,000 and by the end of the year it increases to Rs. 1,15,000.  However during that year, the fund had hit a low of Rs. 95,000.  This option assumes that the investment is made during the lowest point of year, which is Rs. 95,000 in our example, and will guarantee the return of ~21% instead of the actual return of ~10% for that year.  Such guaranteed return is calculated for all the years in which premium is paid and is determined at the end of the 5^th year of policy.  The guaranteed amount at the time of the maturity will be higher of the fund value, highest NAV achieve during the first 7 years of policy or the NAV derived from the above additional guarantee. 

 

Sounds great? Actually it is not.  Since the variation in the fund value will not be significant if one considers the fact that the major portion of the fund will be invested in debt instruments and the high cost of providing this guarantee.  The fund management charge is 1.35% p.a. In addition to this, to provide investment guarantee, additional charge of 0.25% p.a. (under Single Premium Option) or of 0.40% p.a. (under 5 years premium payment term) shall be levied. This is in addition to the premium allocation charge of 5% of basic premium.  For self managed option, depending on the fund chosen, fund management charge of 1.00% to 1.35% p.a. is applicable.  Premium allocation charge remains the same at 5% of basic premium.

The minimum premium amount of Rs. 2,00,000 for single premium option and Rs. 1,00,000 for 5 years premium payment term is also quite high as point of entry in to this plan.  Further, despite such high premiums, the plan fails to provide adequate insurance cover with the maximum cover of just Rs 30,00,000 on a premium of Rs. 1,00,000 p.a. (assuming individual, age of less than 45 years, opts for 5 year premium payment term) and one will be required to purchase additional cover.

Whether it makes sense to go for this plan?

Any financial product with an element of guarantee in it should be dealt with cautiously.  Each guarantee has its cost and as the number of guarantees increases the cost also rises.  The cost in this plan is (i) in the form of additional fund management charges & investment guarantee and (ii) reduced returns.  To provide the guarantee, over a period of time, the fund will be required to park major portion of the investment in debt instruments.  Thus over a period of 10 years, the annualized returns will not be significant.  Surely it is difficult to predict the returns; however after deducting various charges, it will be surprising if the returns are in double digits.  Thus this is not an ideal plan for those looking for long term value creation.  Even for conservative investors, who prefers security of returns, Bachhat advises to go for bank fixed deposits (which nowadays are offering interest up to 10% p.a.) or opt for long term debt funds.  As regards the insurance cover, go for the cheaper term cover.