Look before ULIP

“Good Morning Sir, We have an excellent Child Plan for your Kid” Or “We have an excellent Pension Plan for your retirement”……Basically What they are trying to sell us is a ULIP or a Unit Linked Insurance Plan. ULIP is supposedly the most talked about product in the market. Its time we have a closer look at what’s so good and What’s not so good about a ULIP ?

Heavy Charges

Most of the “Advisors” do not disclose, how much will be the allocation of the premium paid by you. Putting it in simple words, if you pay a premium of Rs. 1 Lakh, then what amount is actually invested in the market. Typically, the charges are named as premium allocation charges, fund management charges, mortality charges, administration charges, Switching Charges, Surrender Charges, Partial Withdrawal Charges, Miscellaneous charges etc. etc. Overall a big chunk of the premium is deducted under various heads as “Charges” and only the remaining is invested in the market. No wonder, your returns are affected negatively. Even if the market does superb, you take a long long time to “Break even”.

Obligations and Restrictions

Once the premium amount is decided, you are forced to pay the same amount every year or else your policy could lapse. Also, if you want to close the policy, you will be required to pay surrender charges. If you want to do partial withdrawal, you need to pay partial withdrawal charges. Basically, you are not in charge of your own money.

Then why do they Pitch it so hard ??

After the removal of entry load from Mutual Funds, ULIP has become the sole bread earner for the “Advisors”. If they convince me to invest in a mutual fund, they have to ask for a seperate fees (which I may or may not be happy paying). Whereas, if they convince me to buy a ULIP, they get fat commission (in the range of 30-40% of the premium amount) from the Insurance Company. Now, even if we may call it an unethical selling, as prudent investors, it is our responsibility to do a “Sense-check” before investing.

If not ULIP, then what ?

The good thing about ULIP could be, being linked to the equity market, it helps you create wealth in the long run. But then, ULIP is not the only option available. You can definitely look at Mutual Funds which will also create wealth by investing the equity market, but the returns turn out to be much better due to lower costs. Also, it provides you with better liquidity and flexibility due to no surrender or partial withdrawal charges.

Does that mean Insurance is not required ?

Are we saying that insurance is not needed. No !! We are definitely not saying that. The problem is, when we try to combine insurance and investments, to get the best of both worlds, we finally get the worst of both worlds. We get a lower risk cover and even lower returns on investments, in spite of paying a higher premium. Rather, choose a term insurance, which works out to be the cheapest form of insurance. For example, for a 30 Year old, a term insurance of Rs. 10 lakh (with a double accident benefit of Rs. 20 lakh) works out to be in the range of Rs. 4000 – Rs. 4,500 (less than Rs. 400 a month).

So, what’s the plan ?

If you want to invest say Rs. 1 lakh per annum in ULIP, try this. Take the term insurance mentioned above for Rs. 4000(say) and invest the balance Rs. 96000 in equity mutual funds through SIP (i.e. Rs. 8000 p.m). Now, try comparing your returns in both cases. In effect, you are covered for life risk and also on your way to wealth creation. What’s more is you have more freedom of investment and redemption as there are no partial withdrawal charges or surrender charges for the mutual funds. Also, no obligation to pay the same amount every year. You can choose to invest any amount you are comfortable with every year. The argument of being subject to market risks holds true for both MFs and ULIPs. The only drawback with this plan is it will annoy your insurance advisor. But as long as he keeps thinking in his own interest, we have every right to focus on our interests and not his.

Tax Saving

The only issue that remained undiscussed above is probably the tax saving aspect. Many advisors would take advantage of March being the last month to make investments and would ask you to quickly invest in a ULIP before you could do a background check. Lets be beware of such advisors.

Now, how do we save taxes ? PPF forms one of the best avenues for investment. However, if you are young and are looking at greater wealth creation, you may do an SIP of say Rs. 5000 p.m in an ELSS fund. The balance amount can be invested in PPF and the term insurance premium. You will observe that you are moving in a truly wealth creation direction along with tax saving.

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh.nidhiinvestments@gmail.com if you have any questions.

(The views mentioned in the article are personal opinion of the author. The readers are advised to use their own judgement and consult their investment advisor before making any investment decisions.)

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Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert. He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com . He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

10 thoughts on “Look before ULIP

  1. Very nicely explained the dark side of ULIPs.

    But one brighter side (ofcourse doesn’t mean advocating ULIP) is since its a kind of closed ended fund, if you have a good fund manager can outperform other open ended mutual funds even indices.

    But, its the charges both declared and hidden that eats up all the advantages of it.

    1. Thanks for your very valuable comments, Sir.

      I agree with your point of ULIPs being inferior majorly because of declared and hidden charges. Additionally, it is the way in which it is pitched what makes it worse. Advisors are seen not highlighting these charges due to their own foul interests.

      Thank you so much once again for your appreciation and insights.

  2. Great going!! I expect this to be one of the most talked about site with the maximum eyeballs in the times to come!! 🙂

    1. Thank u so much bro. Your pat always comes as a great motivator for me to reach greater heights. Looking forward to more visits and valuable insights from you in future.

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