Investing Through ULIPs

Last month, my friend, who is a young software engineer in his early 30's decided to start investing. I thought all my lectures to him regarding compounding effect and early investment benefits paid off. But, fate had it that he went to a private bank for opening a FD and returned home with a ULIP policy. Realizing this fact I did a further inquiry and found all agents of Indian private banks are discouraging their prospects from buying fixed deposits and persuading them to go for ULIPs. Further, they claim that it's a three year investment with free insurance of --- amount and assured returns on endowment. This month, even after all the fights between SEBI and IRDA, nothing has really changed in this business. Bank agents still keep singing about USPs of ULIPs as investment proposal.

Here's what those agents won't tell you:

  • ULIP is not an investment but an insurance plan coupled with a few market benefits.
  • ULIP is a very focused instrument for a very specific need, its not supposed to be treated as a high return alternative to bank FDs. In fact it is not even an investment instrument.
  • There are no assured returns in ULIPs.
  • It is much riskier than the underlying investments, as, even if the underlying investments give negative returns, the banks still deduce all administrative charges.
  • Coupling the above fact with the current slowdown period, many investors' returns reached -100% i.e. their policy became null and void.
  • Most of the ULIP premium paid in first three years is consumed in administrative costs like agent commissions, fund manager fees, insurance premiums and other fixed costs. As the agent cannot receive any commission after these three years, they claim that ULIP is for fixed period of three years.

So, ULIP is NOT suitable for you if:

  • You are in very early stages of your career and don't have many financial burdens
  • You already have a good insurance plan either individual or through your employer
  • Your only need is good returns of your hard earned money
  • You don't want to couple your investments to market risk
  • You have the time and understanding to invest in stock markets and make money
  • Your investment needs are less than 10 years
  • You have some huge and predictable expenses in the next three t

Unfortunately my friend got hit through most of the above points as his age is 25, works for a MNC offering insurance benefits and will be marrying in the next 2-3 years. In fact most of the people get hit in at least one of the above points. Ulip Policy is neither a good investment instrument nor an efficient insurance policy as it can neither match the returns of other market based instruments nor can it be so versatile like modern insurance covers. It is designed to deceive the innocent customers.

 

Source:- http://bit.ly/2tk1X0n