WHY YOU SHOULD AVOID INVESTING IN ULIPs (Endowment plan)

Understanding of ULIP in simple terms:

ULIPs are unit-linked insurance plan. It is an endowment policy wherein the premium that you pay is made up of two components.

1. One part is used to provide life insurance (Coverage/protection)
2. Other bigger part is invested in equity, bonds or mutual funds.

In this fund, the value will be paid as maturity benefits. In case of death during the policy term, the sum assured or fund value whichever is higher will be paid out to nominee. 

Following are the major reasons why you should not invest in ULIPS:

1. Lock-In Period

ULIPS have a minimum lock-in period of 5 years for the tax-saving purpose which is very huge period as compare to other instruments available in the market. For Example ELSS Mutual Fund have a minimum lock-in period of 3 years for saving.

2. Rigid Terms & Conditions:

a.) ULIPs don’t allow the investor to change the insurer or the policy. Ulips do not extend the same flexibility and an investor gets stuck with a policy till the end of the term.

b.) You can surrender a ULIP anytime. But you won’t get your funds back until the mandatory lock-in period is over. Even after your lock-in period is over you can withdraw an only a certain percentage of your premiums paid.

c.) In such a case investor is stuck with a policy because he cannot give up his/her ULIP as it is not recommended because he will lose out handsome returns.

3. The mixture of insurance an Investment

ULIPs are insurance policies with the dual purpose of providing an insurance cover as well as earn you a return by investing. Never mix these two important aspects of your financial life. The purpose of insurance is to protect your family in case of any exigencies. The purpose of investment is to build wealth over time. 

4. ULIPS Cannot be widely tracked

Performance of Ulips cannot be widely tracked so an investor might not know what exactly he will get on maturity. These have a less transparent structure concerning the underlying expenses and asset allocation.

5. Returns

ULIP also generates very low returns (6–8% yearly) like any other endowment policy which doesn’t even beat the inflation in the long run.

6. Risky Instruments.

Ulips are riskier instruments as a major portion of our investment is invested in equity, bonds or mutual funds as per investor choice. An investor can choose which funds to invest in based on his/her risk appetite. Invest in low-risk funds and get low but stable returns or invest in high-risk funds and get high but riskier returns – it’s your prerogative.

7. Heavy Costs and Charges in ULIPS

ULIP deduct following charges from your monthly or annual premium which reduce the amount which is actually invested.

Premium allocation charges

Policy administration charges

Mortality charges

Fund management charges

Surrender charges

For example: if you invest Rs 100 in a ULIP, almost Rs 20-30 can go as upfront commission to the agents, Rs 10 can go towards an insurance premium and only the balance of Rs 60 or 70 is invested.

Because of these charges, ULIP returns become inferior as compare to other investment options available in the market.

8. ULIP v/Mutual Funds

Let’s imagine Mr. A had invested the ₹7 lakh in a ULIP and Mr. B had also invested the same amount in a mutual fund over 5 years. Unit-linked Insurance Plan (ULIP) have typically given around 7% returns after 5 years while mutual funds have generated 15% in the long run.

 Thus it is clear that ULIP returns underperform mutual funds by more than 60% in 5 years even after deducting LTCG tax from mutual fund returns!

9. ULIP  v/s TERM PLAN

ULIP	TERM INSURANCE
Combination of Insurance & Investment	Pure Insurance
Minimum 5 yrs Lock-in period	No Lock-In period
Eligible u/s 80C	Eligible u/s 80C
Very High Premiums	Very Low Premium

In the case of ULIPS, to generate a life cover of 1 Crore you need to pay Rs. 6.70 lakh as an annual premium while in case of term insurance to generate a life cover of 1 Crore you need to pay only Rs 8000/- as an annual premium which is very low as compare to Ulips.

Thus ULIP is costlier by 80 times to a competing term plan for life insurance!

So I believe ULIP is neither a good investment option nor an insurance plan.

IMPORTANT TIPS:

1. Use mutual funds and other avenues like PPF, EPF, etc to plan for your long term wealth.
2. The best investment strategy takes pure term policy as much long you take and rest invest in a mutual fund
3. For 80C benefit invest in ELSS Funds.

Also, read Top Financial Mistakes made by Indians