Thursday, January 22, 2009

Why should you NOT Invest in ULIPS??

One of the most common mistake that people do these days is to fail to distinguish between need for investment and need for security. More often than not people tend to fail to understand the huge implication it has on their decisions regarding money. This is true for people from all walks of life. I amazed at seeing the lack of awareness about various investment opportunities among educated and savvy people . Hence I am going to point out few of the cardinal mistakes that people do especially while deciding on buying insurance.
What is the purpose of buying insurance? By definition an insurance product is meant to protect the policyholder from any uncertain eventualities that may occur in his life and thus it aims at ring fencing the policyholder and his dependents from any financial crisis that the eventuality might bring with itself. But how many of us actually buy it only for the safety sake?
Lets see the popular reasons why people buy insurance (ULIPS mostly) in India.
1. The most popular reason why insurance sells is that it is thought to be tax saving instrument.
2. Because it is supposed to give you both protection against any uncertainty and also returns at maturity. So its like shooting 2 birds with one arrow.
3. Because the insurance agent hard sells this product.
4. It is supposed to be ideal mix of insurance and mutual fund.
Now lets examine the myths associated with each of the above mentioned points.

1. The most popular reason why insurance sells is that it is thought to be tax saving instrument. While it is true that ULIPs help you save tax under sec 80C what is worthwhile to remember is that this is just one of the many instruments available under Sec 80c which offers you the same benefit. There is no benefit which is exclusive to this product. And when you consider all other demerits of this product then you will know that saving tax by investing in ULIPS would be nothing less than shooting yourself in the foot.

2.Because it is supposed to give you both protection against any uncertainty and also returns at maturity. So its like shooting 2 birds with one arrow. This is only partly true . It does offer you protection and return but none in full measure. This means that by investing in ULIPS you neither get the benefit of higher insurance at low premiums which you will get under pure term plan nor you get the return that you will get by putting money in well diversified mutual fund. so this is a case of neither here nor there.

3. Because the insurance agent hard sells this product.This is the last reason why anyone should be buying any financial product leave alone ULIPs. Financial advisors are supposed to be experts at giving financial advice but most of them sadly are good at giving advice which will help them and not their clients. So in effect they will sell you a product in the guise of advice which will help them make good commission. So they sell ULIPS coz it gives them very handsome payouts as compared to a pure term plan or Mutual fund.
For ex- An agent gets upto 30% of the first year premium that you pay under ULIP as commission, while if the same agent where to suggest you a combo of term plan and mutual fund then at best he will make about 1-2% of the total money invested as commission. No wonder why we dont find too many advisor talking about term plan and mutual fund combo.

4. It is supposed to be ideal mix of insurance and mutual fund. There are few who try and give a intelligent spin to their sales pitch by claiming that ULIP is an ideal mix of mutual fund and insurance. Or worse they will tell you that in ULIP while you make money by being invested in the market you get the insurance free. Nothing can be farther from truth than this. First understand that nothing comes free. In ULIP too when you get insurance cover there is charge called mortality charge which is deducted from the money you invest. Plus there is commission that the company pays to the agent + the admin charges+marketing expenses etc all this can be as high as 50-60% of your first year premium if not more. this means if you invest 100 rs in ULIPS only 4-=50 rs will be invested and rest is eaten away by the company /agent etc. Compare this with a term plan and mutual fund the overall charge is not more than 2-3% of the total money invested which means about 97% of your money is accounted for and is invested for you .
So in the conclusion what should you do to save tax , get protection ?
Answer is to understand the difference in the need for security or insurance and investment. For insurance buy term plan which is the cheapest form of insurance. For investment choose any well diversified mutual fund.
Hope this helps you save your money from the smart and cunning advisors out there to con you into the ULIP trap. Check this video out to get an idea about the miss-selling prevalent in India regarding ULIPs.There are many kinds of miss-selling , this is just one of them. More on this in other post.


video

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