You keep hearing about popularly known unit-linked insurance policies are the most mis-sold product thanks to offer triple benefits such as life cover, tax savings and wealth creation. All these benefits may hold true, if you understand the complexities of the product and do not treat in as short-term play. Unfortunately, most of investors have complained that while taken for a ride on ULIPs, they had lost more than 50 percent of their premium money within a short period of span though their agent had assured them the their premium would earn annual returns of over 20 percent.  This kind of assurance is called as mis-sold and mis-bought as well. But there is nothing wrong with ULIPs in generic sense as you can find plenty of faults with the way this product is being pushed. For one, insurance advisors have been aggressively pushing this product promising handsome returns. Invariably, investors don’t know much about the various expenses involved with the product. Also Read: Some Fancy words used by Insurance Agents!

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Front-end Cost Also Read: Buying ULIPs? Read verbose fine print

Most of investors are unaware that insurance companies charge a huge percentage of front-end expenses from the first five year’s premium amount. While there is no fixed percentage for it, it varies from 40% to as high 50 percent in certain cases. Buyers were not told about theses high charges their policies levied in the initial years, nor were they warned of the risks of investing in equities. For instance, if an investor signs up for a ULIP for a first year premium of Rs 50,000, as much as Rs 20,000-25,000 will be deducted as front-end cost. After taking into account the front-end cost for life cover, the investor’s contribution towards his investment corpus will be very low.

However, investors should remember that the high front-end cost as management expenses are restricted to the first five year of premiums and this comes down drastically in the beyond 5 years. As a result, if you are looking at building a corpus through ULIP, you should have to be patient and stayed long term. Though ULIP offers the flexibility of discontinuing or lowering the premium in subsequent years, as the higher costs have already been paid, it will be beneficial for you to reap the benefits of higher allocation to invest in the later years. In fact, the management expenses are even lower than mutual funds when the policy gets older.

Various Fund Options

Ulips offer various fund options to select with different asset allocations to meet the requirements of policyholders with different risk appetite. By spreading investment across equity, balanced and debt funds as offered by the insurer, investors can create a diversified portfolio where the loss on a certain asset class can be compensated by the profits made on another. Policyholders can also benefit from switching strategies as appropriate switches can take advantage of the movement in asset prices resulting from changing financial and economic conditions. Also remember to align your fund portfolio to suit your investment profile and Life Style.

Market-linked Investment

Like mutual funds, Ulips also invest in the stock and money markets. ULIP policy holders are also allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The Premium paid in unit linked insurance plans are subject to investment risk associated with capital markets and the unit price of the units may go up or down based on the performance of investment fund and factors influencing the capital market  and the policy holder is responsible for his decisions. Not only equities, even the debt portion carries a downside risk.

Life Insurance Coverage Also Read: Don’t buy Life Insurance, Buy adequate Cover!

Like a pure term cover, it’s very much true that ULIPs are not the best option for getting bigger insurance cover at a lower price. But, Ulips offer the convenience of combining everything into a single product. Depending on the premium amount you can state, you are offered a sum assured as a multiple of the premium. For instance, if you are comfortable paying Rs 10,000 annual premium on your ULIP, the insurance company will offer you a sum assured of say 5 to 40 times the premium amount. The death benefit of Ulips varies depending on the type of plan you have opted for. Some Ulips give out either the sum assured or the fund value, whichever is higher and some offer give out both the sum assured as well as the fund value.

Understand the Features Also Read: Are you aware about ULIP Charges?

If, you are ready to pay for the convenience of a bundled product but you have to pay the price as to combine the three for convenience. Since agents do promise eye-popping assured returns when no such assurance is given by the insurance company. All you have to do is to begin with filling up the proposal form yourself and provide accurate information. Next, go through the policy documents carefully when they are delivered to you. Scrutinizing the policy features minutely before giving your consent to the purchase is critical. Get verify the details by reading the policy document. It may be a painstaking and boring task, but is certainly worth the effort. If not the entire document, at least check the sum assured, premium payable, mode of payment and total policy tenure carefully.

Conclusion

As a rule of thumb, we suggest 10-12 times your annual salary as a must-have cover. If your need is insurance cover only, buy a term plan, the simplest and cheapest form of insurance. If you still want to buy Ulip, keep a goal in mind like your child’s education or marriage and keep funding that policy till you hit maturity. Of course, this is possible only if the premium is at a reasonable level. If it is very high, the policyholder may find it difficult to pay it year after year. Buy a policy that you can continue without impinging on other financial commitments. But if you want to invest in equity and have a short-term horizon or are uncertain about when you need the money, go with an MF instead.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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