“Do Not Mix insurance with Investment”
“Ulips are a bad form of investment and need to be stayed away from”
“Ulips are heavily charged and are one of the most expensive investment instruments available”
These are some of the reactions heard and said when the discussion of ULIPS comes about. How true are they? Is it worth investing in?? Let’s find out!!!
What are ULIPS?
Unit Linked Insurance Plans or Simply ULIPS are financial instruments offered by Insurance companies in India wherein the investor gets to invest in equities along with also having an insurance cover. This investment intends to offer the best of both worlds, Insurance & Investment, but does it really do so, we’ll find out as the article progresses.
Why are ULIPS Demonised?
ULIPS, by nature, comes with heavy charge structures, charges which include Policy Administration Charge, Premium Allocation Charge, Mortality Charge etc. All these charges add up to at times 8% -10% of the total premium paid in the initial year and hence eat into your returns. However, these charges decrease over time and become zero at one point.
Let’s look at an illustration taken from a popular ULIP Plan in the insurance space. The premium i have chosen here is Rs 1,25,000 /- which includes a Death Benefit* of Rs 12,50,000/- and an Accidental Death Benefit Rider* of Rs 12,50,000/-
Look at the image above and we understand that the Premium Allocation Charge becomes zero after 5 years, the mortality charge becomes zero after the 15th year and there are regular additions in the form of wealth boosters and other benefits that are added over and above the market returns.
Also, look at the top of the image above and we observe that assuming that this investment gives a Gross Yield of 8%, it would deliver a Net Yield of 6.58%, which means that incase this investment is held for a period of 30 years, it would accumulate a charge of 1.42% which is lesser than mutual funds which charge 1.5% to 2.5% depending on the fund.
However, the picture totally changes when you are looking at investing the same value for a shorter period of say 10 years. In this case, assuming the Gross Yield is 8%, the net yield turns out to be 5.79%, which means that the charges are at 2.51%, which is significantly expensive.
Should you invest in ULIPS?
The answer to this is highly subjective. While ULIPS may not be the best form of investment , it is also not as bad as it is claimed to be. It is a victim of the way insurance is mis-sold in our country and hence has a negative view attached to it.
Incase you are looking at investing for a period of maybe 10 years – 15 years, you would do well to avoid a ULIP investment since ULIPS are front loaded on charges and would give Sub – Optimal returns in a short time period. However, this form of investment can be considered, incase it is aimed at product diversification and has a very long withdrawal horizon, since the charges decrease overtime, benefits get accumulated and hence charges average out between 1% and 2%.
*Death Benefit – The insurance amount given out to the investor or the ULIP policy holder incase he/she expires during the policy term is called Health Benefit
*Accidental Death Benefit Rider – Incase the investor or the policy holder expires by way of an accident, the insurance payout given out includes Death Benefit + Accidental Death Benefit Rider*
Ulips seem to have a complex charge structure that can significantly impact returns, especially in the initial years. While the charges decrease over time, it’s crucial to evaluate whether the long-term benefits outweigh the costs. The comparison with mutual funds suggests that Ulips might be more cost-effective in the long run, but this depends on individual financial goals. Is the dual benefit of insurance and investment worth the initial high charges? Given the growing economic instability due to the events in the Middle East, many businesses are looking for guaranteed fast and secure payment solutions. Recently, I came across LiberSave (LS) — they promise instant bank transfers with no chargebacks or card verification. It says integration takes 5 minutes and is already being tested in Israel and the UAE. Has anyone actually checked how this works in crisis conditions?
Howdy! This blog post could not be written much better!
Looking at this postt reminds me of myy previous roommate!
He always kept talking about this. I’ll forward this article to him.
Pretty sure he’s going to have a great read. Thank you for
sharing!
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