“No Sir, the Old Expensive ULIPs have gone now. The New ULIPs have been launched with much lower charges. You should invest in them”. These are the new “in-statements” of the insurance advisors these days who were going ga-ga over the Old ULIPs to be purchased before 31st August as according to them, the ULIPs will be totally unattractive after 1st Sep 2010. (Obviously, they were viewing the discontinuation of the old ULIPs as a painful extinct of their money making machine).

What is surprising is, how can these guys suddenly take a 180 degree turn on their opinion in such a short time? Must say, they really need to practice a lot to do so.

Anyways, what is more relevant for us is, are the new ULIPs any better for us ?? Lets have a look

Lower Charges

The new ULIPs are being marketed with the USP of having “Lower” charges. Now why are the charges lower ? Because they are less than the exorbitantly high charges earlier. Something like saying, “Earlier we were hitting you with a Stone, Now we are hitting you with a brick. So you should be happy”. Why should I be happy ?? I am still getting hit with the charges when I have cheaper options available with me. Or in other words, what I can see is, the “Low” charges of new ULIPs are still higher than the charges of Mutual Funds. So why should I still go with ULIPs ??

Mandatory higher Life Risk Cover

IRDA has suddenly realised that any insurance product should have a component of insurance in it and thus the new ULIPs would have a minimum life risk cover of 10 times of the annual premium paid. Again, problem remains the same. If a person pays a premium of Rs. 50,000 then the life risk cover would be Rs. 5 Lakhs. Now a life risk cover of Rs. 5 Lakhs is still a very insufficient amount for a person who is paying Rs. 50,000 as premium and would be earning in excess of Rs. 3 lakhs p.a. So new ULIPs lose on insurance front as well. Term plan still remains the best option. For a 30 Year old, a term plan of Rs. 50 Lakh could be available at a premium of just Rs. 8000-8500 p.a. Would be surprised if any new ULIP could match that. So why ULIP then ??

Increase in Lock-in Period

“ULIP is a long term product and thus the lock in is increased from 3 years to 5 years”. The investors in our country would give up on liquidity generally for 2 reasons : One is tax saving and other is assured returns. This is why we have successful investments in Banks FDs (for assured returns) and ELSS for tax savings in spite of lock-ins. However, given that after the current DTC, ULIPs will not qualify for tax savings, how good a deal it would be to give up your liquidity for 5 years ?? Also, if you decide to invest say Rs. 1 Lakh in the new ULIP this year, then you need to invest this amount for next 5 years. However, you might not get the tax benefit from April 2012. So you will need to pay Rs. 1 Lakh for this ULIP and Rs. 1 Lakh for the tax saving investments as well. So why ULIP ??

Lower Surrender Charges

Again referring back to the point of “Lower Charges” above, my first question is

“Why should there be surrender charges at all ?”

Their Answer, “To recover the initial acquisition costs”

My next question, “Why there is such a high acquisition cost?”

Their answer, “Because we have to pay high commissions to our agents”

My further question, “Why do you pay such high commissions to agents”

Their answer, “Because they have to convince a lot for these products. People don’t buy easily”

And My Final Conclusion is, “People don’t buy easily because there are surrender charges and several other charges which make these products unattractive”. So basically this is a vicious circle of Surrender charges which would also sound like the “Egg and the Hen Story”. Point is, ULIPs still have surrender charges and thus they would strangle my liquidity.

Minimum Return Guarantee of 4.5%

The minimum return guarantee might sound like a breather to those who are scared of the markets. But in my opinion, this feature kills the long term benefits of ULIPs. The problem with ULIPs was never that it is linked to the market. The problem was with the heavy charges and the way it was being marketed. So introducing this feature would compel the insurance companies to park more money into debt products and thus my dream of creating wealth for my retirement with the help of ULIPs will be shattered to pieces.

To Conclude

In a nutshell, I would say that, though the new ULIPs could be “slightly” better than old ones, they are still not good enough an investment or insurance option. For insurance, go term, get high risk cover at low premium. For investments, go SIPs, get benefits of liquidity, flexibility and still earn good returns in the long term without having headaches calculating surrender charges.
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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7 Comments

  1. Whoa !!

    So the fooling around still exists !! I thot these guys have become investor-friendly now.

    Looks like its more of a confession that we were making a bigger fool of you earlier, but making a smaller fool of you now 😉

    1. Very Well Said Mr. Karan !!

      It actually sounds like a confession of bigger sins earlier and showing a rosy picture by smaller sins now 🙂

      Thanks for your visit and feedback. Looking forward to more in future.

  2. Instead of making it ‘charges and chrages every where’ on account of Agent commission, it should start follow MF way. Service charges to be paid by Customer directly instead of Insurance Cos taking even more money on name of commission. Yes Insurance Agents deserves service charge as they are giving you serivce and taking pain on your behalf. But getting directly paid by customer will ensure their interest and better service towards customer rather than Insurance Cos. Also, who wants to take pain themselves and do the process directly they don’t incur any charged unnecessarily. (Note: I still have personal opinion of keeping insurance & investment seperate)

    1. I Do agree with you Sir. In fact, I remember there was a proposal submitted last December for the same issue. But it was turned down by IRDA due to some own strange reasons known only to the “Honorable” Chairman Mr. J Hari Narayan.

      So now the ball lies in the court of the investors to play alert and not fall prey to the “Smart” Strategies played by Insurance Companies and Insurance Agents !!

      Thanks again for your visit and feedback. Please do keep visiting this space and provide your valuable insights.

  3. I have a question !!

    One of the agents told me that by investing in ULIPs I will get Insurance + Investments + Tax Savings.

    Going by this article I lose on all 3.

    So what is the point in going for ULIP ? Or is there anyone for whom NEw ULIP will be suitable ??

    1. Very Good Question Sneha.

      Not only your agent, but in general, maximum agents try n sell ULIPs with this mantra only. What they do not tell you is, how much investment, how much insurance, what charges and how much is his commission.

      If he tells you, you would come to know that you lose on all 3 fronts going the ULIP way. So in my opinion, there is no point in going for ULIP.

      Would there be anyone for whom new ULIP would be suitable ?? Answer is yes. For All those who are still having a nice sleep over investment planning issues and still mind paying fees for a good advice, ULIP is still a very good product. They don’t need to pay a fees to the advisor. Other disadvantages, well, they are destined for that I must say.

      Thanks for your visit and feedback. Looking forward to more in future.

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