Quick post on ULIPs

by Manshu on December 30, 2009

in Insurance

Post image for Quick post on ULIPs

I have never written about ULIPs here because I don’t like them one bit, and as a result don’t read or pay any attention to them. But last week a friend told me about a ULIP plan he was interested in, and I went in and checked it out a bit. That post is still work in progress, but I read this piece about SEBI issuing a show-cause notice to an insurance company, and thought I’d do a quick post about why I don’t like ULIPs.

From Moneycontrol:

Capital markets regulator Securities and Exchange Board of India, or SEBI, has issued a showcause notice to an insurance company, learns CNBC-TV18 quoting sources. This comes in the wake of insurance companies transgressing into the mutual fund territory, report CNBC-TV18’s Mrinalini Krishna and Avni Raja.

SEBI has sought an explanation from the company asking why one of its insurance products does not have an insurance cover and whether this amounts to selling mutual funds.

This is the reason I dislike ULIPs. Insurance and mutual fund investment are two different things, and they really don’t go well together at all.

People like ULIPs because they don’t like wasting money on insurance. Most people I speak to think of ULIPs as insurance that will get them at least some money back at the end of the plan, instead of term insurance which is just sunk cost.

The fact of the matter is – term insurance is significantly cheaper in terms of pure insurance and while you may think you are getting something back with ULIPs, you end up paying a lot more for insurance, and the investment portion of it is subject to market fluctuations anyway, so there is no real gain there either.

I am going to take a closer look at ULIPs next year because a lot of people are interested in them, but I strongly suggest that before buying a ULIP, you check out the term insurance rates from LIC to see how much you would have to pay for just insurance. That might just change your mind. Here is the link to check that out.

Photo Credit: Wheat_in_your_hair

{ 12 comments… read them below or add one }

Shweta January 12, 2010 at 2:27 am

To whomesoever it may concern –

I read and appriciate your concern here about ULIP.You being a blog writer do not like ULIP is only a matter of fact that its your individual like or dislike. Let me share my views on this :

1. ULIP is the safest way to diversify your investment and gain protection for a investor who has long term investment strategy.

2. ULIP is also a financially engineered product like Mutual funds and derivatives, but its less riskier as its well diversified.

3.If i talk about my own organisation we beleive in need based selling. We have solution to cater various financial needs which are long term in nature. The plans which we offer comprise –
1.Protection (pure insurance)
2. Investment (Estate planning)
3.Saving (to meet future financial needs)
4.Pension

4. Now Let us discuss each of this. We dont have any ULIP in protection category, as this require lowest pricing which is slightly impossible in case of ULIPs.

Investment – People who wants to put one time money and expecting a real growth without any risk in long term are the ideal prospect for this category.

Saving – I Agree there are many avenues of saving your funds still people prefer ULIP over other for following reson –

* Integrated Insurance cover at nominal charges
*felxibility
*transparency
*tax benefit under section 10 10 (D) of income tax act.
*Diversification
*Good returns (which may beat MF over long term)
*Liquidity

5. Now can you suggest me a sloution for a person –

Who does not understand market situations and lack financial expertise, Who wants a real growth for his money, have long term saving prespective, and at the same time wants a protection cover towards the amount he invested ………???

6. Sir there are millions of recepies to satisfy the hunger, i cant say pizza or any other fast food is not a right choice to satisfy once apetite. Its a matter of choice. If i like pizza i will eat and if i dont i will not. Thats what we call freedom, freedom to decide …..

7. Last but not the least – “profitability is matter of priority ” . So a person who have certain priorities which is only served by ULIP why to complicate the matter by buying two different product and maintaining them.

I hope i made myself clear.

Regards

Shweta

Reply

Manshu January 12, 2010 at 4:43 am

Can you support even one of your points with data?

Reply

Sumeet Gupta March 14, 2011 at 11:27 pm

Shweta,

if you really want to diversify your portfolio, you can use equity funds, debt funds or balanced funds. ULIPs will charge me in the first year itself, and the charges could go as high as 20% (i may be wrong, as they can be even higher). So, if i invest 50k p.a., my total investment actually is only about 40k. It means that i lose 10k and with that, i lose the power of compounding for my 10k. Also, what is the insurance cover i get? A mere 3-4 lacs or so. For 7k premium, i have an iTerm plan for a cover of 70 lacs! You talk about tax benefit in ULIP – Well, if i lose 20% first up, it offsets my tax gain big time. ELSS are way better for tax benefits.
The only reason that ULIPs are sold in India is that it gives the agents a handsome commission. That’s why you see every neighbourhood uncle and aunty, who don’t even know the “F” of Finance, line up to sell you one. I could go on and on criticizing ULIPs and mentioning the benefits of MFs. But have to keep the space and time constraints in mind!

P.S: Nothing personal, but i’ll never want to have you as my financial advisor 🙂

Reply

Manshu March 15, 2011 at 4:55 pm

Awesome comment Sumeet! Really glad to see sharp readers such as yourself!

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Sumeet Gupta March 16, 2011 at 11:01 pm

Thanks Manshu. And keep up the good job of educating people financially. I replied to Shweta, even though i am sure that she won’t be reading it, so that no naive person gets impressed by her illogical reasonings. I owe it to people like you who have changed my outlook towards finance. I just wished i had you guys around 2003, when i started earning. BTW, I myself am a victim of 2 ULIPs sold to me by a neighbourhood aunty:(

Reply

Manshu March 17, 2011 at 6:33 pm

I certainly appreciate your kind words very much, and I was really delighted to read your response since its difficult for me to tackle all the comments I get on my own.

I have to draw a line of not engaging with a commenter at some point, or that’s all I’ll be trapped in doing, so I feel great when I see someone else fight that battle 🙂

Reply

Shweta January 12, 2010 at 9:18 pm

What data do you want???

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Ishita Sharma November 9, 2010 at 12:27 pm

ULIP as an investment is considered as a preferred investment option among investors in India. However the investors are not aware of the expenses/charges which they pay on an ULIP scheme. Before you make an investment in ULIP, you should know all the expenses on a ULIP scheme.

Read the complete article – http://www.investmentbazar.com/ulip-info-for-every-investor/

Reply

Amit Khandelia January 30, 2011 at 10:50 pm

Hi Manshu,

I have read loads of stuff on term insurance plan and endowment plans.

Lately, online insurance policies is making lot of noise. I am also sharing one of the link on that. Also, it would be great if you can do a post on comparison of online insurance premium chrged by all the operators.

http://economictimes.indiatimes.com/personal-finance/insurance/analysis/new-insurance-plans-with-low-premiums-what-does-this-mean-for-you/articleshow/7123089.cms?curpg=2

Thanks in advance

Amit Khandelia

Reply

Amit Khandelia January 30, 2011 at 10:52 pm

I compeltely agree with Manshu.

This morning, I was discussing the same thing with my friend.

I haven’t seen a single positive article on ULIP till date.

If your motive it insurance, go for termm plan and if investment go for mutual fund.ULIP serves none in its best sense..

Reply

Shweta February 2, 2011 at 6:32 am

Amit,

I completely understand your concern as Being a research scholar I know that though literacy rate in India in last few decades has gone up the financial literacy still remain as a matter of concern.

When it comes to deciding about our spare money, still we prefer safe investments like BANK FDs, bonds, money market instruments etc.
As a investor we look forward for –

Best Value for our money
With in Short duration of time
And with least cost and inconvinience

And for advice on investing or saving our money till date we depend on DATA from reliable and unreliable sources. This is one of the reason that Share market is highly speculated in India. How can another person understsand what I want, what are my financial goals, my financial plans….Its an individual who should be deciding about it. Then comes the role of a financial consultant or planner in picture.However in this whole episode we forget the three golden rule of investing –

Higher the capital higher the return
Longer the term of investment or saving higher the return
Higher the risk, higher the return.

You probably wouldnt have heard or read abour any single article about ULIP, reason u must be knowing wel, however in todays time with drastic shift in ULIP pattern and structure, its certainly one of the best instrument to cater demand of masses. Its uncomparable and unbeatable.

There’s no point of comparision between ULIP and MF as they both are seperate instrument and hold different place and importance.

If you have to travel within city limits what will you prefer – Auto or VOLVO
If you have to travel from one city to another what will you prefer – Auto, taxi, VOLVO, Train, Plan….

You will see that with distance the choice increases…and so do the confusion. See its very simple investment or saving your money in any avenue is individuals choice however as an investor or saver one must first ask –

Where I have to reach and in how much time I have to reach. These two question will help you to decide you shud go for ULIP or for MF.

Thanks and Regards

Shweta
7666366406

Reply

ClickInsurance.co.in October 5, 2011 at 11:35 pm

ULIPs are indeed a good investment vehicle from tax savings perspective as well. But the purpose should not be confused with that of Term insurance. Although ULIPs provide life cover to the insured, term insurance is very critical from the amount for which the person is covered. For the same sum assured, ULIPs can be quite expensive. Moreover, they are dependent on Market risks, so it is critical to assess one’s risk appetite before buying ULIPs.

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