You might not know what an ULIP is, but if you bought anything from your neighbourhood financial adviser aunty, then you might already have it with you.
ULIP is Unit Linked Insurance Plan. It is an investment instrument offered by an insurance agency where you get both life insurance coverage and returns from your investment.
I think ULIP’s were invented because the average Indian could not digest the idea of paying a premium each year for life insurance and not getting anything back when the term ends. It’s really hard to sell.
But if you charge twice the premium and invest half of the money in the stock market and return the profits from that half, then it’s easy to sell!
Stay away from ULIPs. You are seeing a pattern here, stay away from anything that an insurance agent or any neighbourhood financial adviser is trying to sell you.
If you need life insurance, buy a term insurance. Buy it from their official website and deal directly with the insurance company.
ULIP’s are very popular among insurance agents because the commissions are attractive. Where does this commission come from? Your “investment” of course.
If ULIPs Can Provide Both Insurance And Investment, What Is So Wrong With It?
ULIPs generally have a long term. If you want a life insurance plan for 25 years, your ULIP will be for 25 years.
In these 25 years, you will have life insurance cover for sure. But a term insurance can provide that too.
In a ULIP, your investment is also tied with them for 25 years. Even if they perform poorly, you have no choice but to stay invested.
If you do the investment yourself, i.e. buy a term insurance and then invest the remainder in a mutual fund, you can cash out when the markets are booming or change mutual funds if you notice that the fund isn’t doing so well after few years.
What About ULIPs That Guarantee Returns? Mutual Funds Cannot Do That!
If anyone is assuring you a guaranteed return, the return would not be great. If that was not the case, why would anyone take any risk and invest in equity?
ULIP sellers make it sound like you are getting massive returns. For example, if you pay premium for 12 years, you will receive guaranteed income from 14th year to the 25th year that is just as much as more than the premium you paid each year.
On the face of it when you do a quick math of what you spend and what you receive, it will sound spectacular. That’s how it is designed to look like!
What is not immediately apparent is:
- The number of years in which your money is locked in. If you need money prematurely you are out of luck.
- The effective rate of return will not be sufficient to beat inflation. 6% return for an investment horizon of 25 years is peanuts!
Here is an excellent article that reviews many such offerings with effective return calculations. Just as you scroll through the article you will notice how difficult it is to understand any of their plans!
Pro tip: If an investment instrument is too hard to understand, something is not right. Be vigilant! Only invest in instruments that you understand.
I have been offered with such instruments ever since I graduated and never have I found one that makes even FD beating returns in a reasonable time frame.
Remember: The only way to make a profit from ULIP or any life insurance is if you die! So if you want to maximise that profit, get a term insurance.