“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 ?
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.
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.
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(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.)