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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