Why it is important to examine all products offered by an insurance company before buying one

In todays market, you have different products offered by the same company. Some of these products are designed with the investor in mind and to provide maximum benefit to the Investor whereas some of products are designed to rob the Investor for the benefit of the insurance agent and the insurance company. I have used a strong word ROB because that is what some of the products actually do. To explain the relevance of my earlier statement, I would like to compare two different ULIPS offered by Bajaj Allianz

Policy Name	Policy Admin Charge	Initial Loading Charge
New Unit Gain	Rs.600 per annum	71.5% first year
New Unit Gain Plus	Rs.240 per annum	24% first year

Clearly, the charges in "New Unit Gain" are significantly higher than "New Unit Gain Plus". I checked to see if New Unit Gain offers any additional benefits to justify the higher charges. You will be suprised that "New Unit Gain" does not offer any additional benefit to justify these additional charges over "New Unit Gain Plus".

Very recently my co-worker was asked to take "New Unit Gain" policy by his insurance agent. He was not even told about "New Unit Gain Plus". The incentive for the agent to sell "New Unit Gain" is because he gets higher commision. I had a similar experience in the past with ICICI. The agent kept offering me "Lifetime" while "Lifetime II" was a much better product.

It is sad when insurance companies resort to such tactics to exploit the ignorance of thier customers for their own benefit. They should be more proactive in "stopping sale off" older products(like LIC) once they have launched newer/better products.

CONCLUSION
Donot leave it to the insurance agent to identify the product that best suits your needs. I have come across many insurance agents who are more interested in thier commission than your interests. So do your home work before buying a policy. Visit the website of the insurance company and download the brochures of the different products they offer and spend some time reading them. If you can't seem to understand the brochures, you might want to visit forums/blogsites (like moneycontrol.com) to get the opinion of others.

Have a question about Insurance/ULIPS??

If any of you have any questions related to insurance that you would like my views on, please feel free to ask.

Risk Management: Allocation of funds to equity and debt

I am sure many of you might have wondered how much exposure to equity is safe at any point of time. I am suggesting two methods, one based on weighted average PE Ratio of Nifty or Sensex, and the second based on term of the policy.

Fund Allocation Based on Nifty/Sensex PE Ratio
In this approach, I decide my allocations to equity and debt based on weighted average PE Ratio of Nifty or Sensex. At higher PE Ratio levels, I advise reducing your exposure to equity. Similarly at lower PE Ratio levels increase your exposure to equity. You will be able to find weighted average PE Ratio of Nifty or Sensex at bseindia.com or nseindia.com. The reasoning behind this approach is we have lesser exposure to equity when we think the market is expensive. We have more exposure to equity when the market is cheap. The following is the asset allocation I would suggest based on PE Ratios.

PE Ratio	Equity Exposure %	Debt Exposure %
Below 13	90 - 100	0 - 10
13 - 16	70 - 90	10 - 30
16 - 20	50 - 70	30 - 50
20 - 24	20 - 50	50 - 80
Above 24	0 - 20	80 - 100

Fund Allocation based on the Term to Maturity
This approach is applicable to goal based investing, example planning for children's marriage. In this approach we decide asset allocation ratios based on the term remaining till goal or maturity. The longer the term to maturity in years, the higher the exposure to equity. The idea behind this approach is that we take higher risk when we have more time on our side. We take less risk if the by when we need to funds is less.

Term Left from Goal	Equity Exposure %	Debt Exposure %
Less than 3 years	0 - 20	80 - 100
3 - 6 Years	20 - 50	50 - 80
6 - 10 Years	50 - 80	20 - 50
More than 10 years	80 - 100	0 - 20

Which charges have the biggest impact on returns

I have been trying to measure the impact of the following charges on overall returns

• Loading Charges

• Admin Charges

• Fund Management Charges

I have used the following three plans in my comparision.

• Bajaj Allianz Unit Gain Plus

• HDFC UnitLinked Endowment Plus

• ICICI Lifetime Plus

Loading Charges
HDFC - 60% first year
Bajaj- 24% first year
ICICI- 25% first year

Admin Charges
HDFC - Rs.240 per annum
Bajaj- Rs.240 per annum
ICICI- Rs.720 per annum

Fund Management Charge
HDFC - 0.80%
BAJAJ- 1.75%
ICICI- 1.50%

For an Investment amount of Rs.24,000 per annum assuming an annual return on investment of 10%, the following is how the returns look like

Investment Time Frame - 5 Years
Best Returns - BAJAJ (7% more than ICICI)
Second Best - HDFC (2% more than ICICI)
Last - ICICI

Investment Time Frame - 10 Years
Best Returns - HDFC (5% more than ICICI)
Second Best - BAJAJ (3% more than ICICI)
Last - ICICI

Investment Time Frame - 15 Years
Best Returns - HDFC (8% more than ICICI)
Second Best - BAJAJ (1% more than ICICI)
Last - ICICI

Investment Time Frame - 20 Years
Best Returns - HDFC (12% more than BAJAJ)
Second Best - ICICI (0.5% more than BAJAJ)
Last - BAJAJ

Investment Time Frame - 25 Years
Best Returns - HDFC (16% more than BAJAJ)
Second Best - ICICI (2% more than BAJAJ)
Last - BAJAJ

For an investment time frame of 5 years, Bajaj Allianz Unit Gain Plus seems to offer the best returns. For any investment time frame of 10 years to 25 years, HDFC seems to offer the best returns.

Regarding charges, on the long run, Fund Management Charges have the most significant impact on performance. You will notice the gap in returns between HDFC and other widening as time passes(inspite of 60% loading charge). This is because it has the least FMC. Even ICICI which offer slightly better fund FMC than Bajaj has been able to surpass the returns of Bajaj Allianz Unit gain plus on the long run.

CONCLUSION
Fund Management charges are the most important charges for long term investments. Chose a ULIP product that has the least fund management charge to maximize your returns.