Tuesday, 21 June 2016

ULIPS - To invest or not to?

The economy was booming. India was termed as the next big thing. Real estate peaked. Subprime crisis was at its nascent stage and i-bankers brushed it aside citing bloated 'strong' fundamentals. Signs that the economy was heating up were ignored by investors. Everyone wanted to ride the boom wave and make lots of money. In the middle of all this, an interesting phenomenon was happening in the Indian insurance circle. Its termed as ULIPS (Unit Linked Insurance Plan). Wiki defines it as "A unit-linked insurance plan (ULIP) is a type of life insurance where the cash value of a policy varies according to the current net asset value of the underlying investment assets" It was gaining popularity in this period as liquidity was too high, FIIs were pumping in lots of money into a bubble that would eventually burst a year later. The idea of ULIPs in India brings back memories of UTI launching a mutual fund with tax cover in 1960s. UTI played around with double benefit of Insurance and Returns. It crashed big time once liberalization came into force and others took over. The rest is history
I remember every second friend/acquaintance/relative doubled up as an agent selling ULIPs. I used to get nonstop calls from them promoting the promoting the product as 'never like before' / 'best of both worlds' et al. What was not disclosed is the sky-rocketing charges which would be hidden from you. Let’s dissect and see what this product is all about and why one should look at better options.
Every investment of a prudent investor should always be tied to an objective. Eg. "To generate wealth for my children's' education". ULIPS are meant to be an Insurance product that invests in equities. This violates the very basic principle of investing that "Insurance and wealth generation cannot and should not be mixed". Each objective should have a specific instrument that serves only that purpose.  Insurance is something that should be taken considering the well being of the near and dear after ones' gone and not for the attractive returns. It should not be a hasty decision purely based on investment myopia or some mis-selling pitches. As ULIPs would be the product that would be pushed the most by agents (for higher commissions), be well informed about the instrument and its features
Be wary of the following things before deciding on ULIPs
1. Your agent says that you can exit the product n 3 years and stop all your premium payments and still enjoy the Insurance cover.
Truth- Though it’s true that the policy would be in force, be ready to see your capital erode in lieu of mortality charges/admin charges. Once the corpus is eroded by these charges, only then the policy ceases to exist. You won’t be even able to recover your capital. Also your agent would insist you pay your premiums once a year. Though this doesn’t constitute mis-selling, it increases risk of reduced persistency as paying bulk once a year maybe taxing for the investor that he may stop paying premium. The agent would get his commission anyway :)
2. Promise of Guaranteed returns - Your agent may say that the product returns are guaranteed.
3. Lack of history- As we know, ULIPs are fairly new in the market. There is no proven track.
4. Best Ulip Insurance plan work best only when invested in a time period of 15 years and above. Don’t try to short any ULIPs and expect sky high returns.
5. Be very clear on the admin and other charges. ULIPs typically are front loaded, in the sense that most of charges are upfront. For the first year, the typical allocation would be 50%. Be ready to face it! Read the offer document carefully. Typical premiums break up looks like the one below
This implies that ULIPs may lose its tax shield. Even if it comes under the umbrella of 80C, the sum assured should be atleast 20 times the premium paid, which sadly is not the case with many ULIPs.The typical ratio for ULIPs is 1:5
As we speak, ULIPs today contribute close to 80% of premia in life Insurance sales. Though it’s an encouraging sign that investors look at equity as an investment avenue, it’s disturbing to see the lack to investment discipline that is the heart of investing.

Source: http://blogs.rediff.com/bestulipinsurancepolicy/2016/06/21/ritikashah11998-33/

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