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At the risk of sounding like a partypooper, let me say something unpleasant. I think Ulips are terrible products whose runaway success is a tragic instance of marketing nerds outwitting product designers. Ulips are sin and should be avoided like the plague. If you are still reading my apparently insane proposition, permit me to explain.
To begin with, there’s the design defect. By definition, Ulips force you to buy investments (equities, bonds or a combination of both) along with an insurance cover. Every insurance product, except for term insurance, locks your financial commitment in an investment scheme. While endowment plans promise to pay you a lump sum after a few years, money-back plans give back some money at fixed intervals. They fund these paybacks from the investment component of your insurance premiums. With Ulips, you go a step further. You are committing a part of the investment component to subscribe to units of a collective investment scheme (a mutual fund, for all practical purposes).
I think it’s a silly idea to buy insurance and investments together. You can buy mutual funds separately at your discretion. There is no need to lock in a fixed amount to units of a mutual fund (clubbed with insurance cover) with a multi-year horizon. If you must commit to investing regularly, take a SIP with a mutual fund of your choice. Why club it with insurance?
Ask the person who’s pushing Ulips why he doesn’t sell you a term plan instead. Insurance agents make the lowest commissions on term plans, so it’s often a function of how much they get, not what’s best for you.
Insurers allow free switches between funds in a Ulip. Surely, they have padded these little overheads into the cost? On the other hand, mutual funds are more efficient. They offer no unnecessary thrills. If I don’t like the way my investment is managed, I can simply redeem it!
Despite several reminders, my insurance agent has failed to give me the break-up of my premium: how much goes into risk premium, how much is allocated to investments and so on. Let’s say that when I pay Rs 10,000 as premium, Rs 5,000 goes towards risk premium. Does it mean that the rest goes entirely towards the investment scheme? I suspect it may not add up so easily and that there is some in-built loss for me. Yes, there is a loss in investing in a mutual fund (as entry load) or even in case of a pure term policy (agent’s commission). But make a comparable combination (of term insurance and mutual fund) from the same fund/insurance house and check the cost of a similar ‘benefit’ under Ulip.
The underlying reasons for buying insurance and investments are fundamentally different. The reasons for remaining in (or opting out of) such schemes might be different, and can occur at different times during the (usually long) tenures of such schemes. So why should you buy them together?
—Dipen Sheth is Head of Research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws
