Most of us are familiar with LIC or the insurance company products. We have seen the adverts on TV, print and heard them on radio ad nauseam. They sound like they have been created to provide for your kids’ education, nest egg in case of retirement and just a safety net in case something happens to you. Nothing can be farther from the truth…
Just to clear the air, there is good insurance in the form of term insurance and health cover. But if it is a product that someone is trying to sell to you then, 9 times out of 10, it would be safe to assume that it is either an ULIP or an Endowment plan. There have been studies where the practice of mis-selling ULIPs have been well documented, especially by the Banks. This is because of the fat commission that the agents/ distributors make on the sale of each ULIP to an unsuspecting customer.
Like any other financial product, we should evaluate a ULIP on four parameters:
Your advisor/ banker is given to compare the returns of ULIPs and a Mutual fund. However, returns of ULIPs do not account for costs on the account of policy administration, mortality charges or switching costs. As a rule of thumb, you should reduce 4–5% from the absolute return being projected for ULIP, i.e., if the advisor tells you that the ULIP gave 15% returns, then the effective return before taxes, would be 10-11% (15% — 4%). Most good mutual funds will give significantly better returns and What-You-See-Is-What-You-Get.
For like to like comparison on returns, the top Mutual funds tower over ULIPs on the returns generated for the investors.
This is what a Fund house or a Insurance company charge you for managing your money. The Bose Committee report estimated the average cost of ULIP to be around 7–9% versus a 1.5–2.5% in a typical Mutual Fund. ULIPs are costly. Period. They charge you upto 50% more than what you get at Policy Bazaar, Coverfox etc. for the same insured value.
3. Ease of managing the product
It is not easy to exit ULIPs. You are stuck with the product even if you do not like the returns of the fund. There are charges for porting out of the product. You advisor might try telling that you can switch between debt/ equity whenever you like. However, most investors are not able to take an informed call on this and incur additional costs on switching.
4. Tax implications
Mutual funds are typically more tax efficient than ULIPs. Equity mutual funds attract zero taxes post 1 yr and debt mutual funds are taxed at effective rate of 2–5% post indexation. ULIPs are under a complex tax treatment where part or almost all of the returns might be taxed.
What’s in it for me?
While ULIPs are not as toxic as they used to be. They still remain costly, deliver low returns and heavily pushed by agents/ banks. They have consistently lagged returns of Nifty/ Sensex.
There is still a long way to go before ULIPs become competitive via-a-vis Mutual Funds. Detailed comparison is given here.
We suggest all investors to stay away from ULIPS. Just stay away.
ONE: Invest the same amount in an ELSS (Equity Linked Savings Scheme) Mutual Fund. See the amount you need to invest and the funds here.
TWO: Get a Term Insurance of 5x your annual salary
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*All returns are indicative basis past performance. Actual performance can vary.*