ULIP is one interesting thing about insurance.What exactly is ULIP? ULIP means Unit Link Insurance Plan. Let’s discuss that in detail. Insurance Companies, offer many policies which are combination of the Insurance and Investments. Under these policies, they collect the money from the customers as Insurance Premium and invest that money. At the end of the policy term, customers, get their Investments, returned as per the NAV of the Fund run by the Insurance Company. In addition to that Insurance Company provides some amount of Insurance Cover to the Customer. Yes, broadly this is the idea of the ULIP. It combines the Investment and Insurance in one product.
Now apparently, any layman would have an impression that this must be very excellent idea to have the product which serves two important purposes of Finance i.e. Investment and Insurance. But in reality this product spoils both the purposes of the customers. Here are the 7 Reasons you should avoid ULIP
1. Huge Administrative Charges in ULIP :
In ULIP policies, they charge heavy percentage of policy amount as, administrative charges. There are Premium Allocation Charges, Mortality charges, Fund Management Charges, Policy Administration Charges. In initial years, these charges are very huge. Insurance company deducts these charges from the premium paid by you. In First year if you pay annual premium of INR 10000, you pay around 2500 to 3000 for all different charges. And only balance is invested for you.
2. Ignorance of the Customers about the Investments made :
Many of the customers who pay premium for the ULIP policies are totally unaware of, where exactly the premium paid by them is invested. Which type of Fund, the premium paid by them is invested, is very important thing the customer should know. But there is widespread ignorance about it. Insurance companies can invest in Equity Oriented Funds or Debt Oriented Funds. And in fact the customer is given the choice to switch from one to another. Of course this also comes with the Fund Switching Charge.
3. Inadequate Insurance Cover:
The insurance cover of provided by the ULIP policies are not at all adequate so if you pay annual premium of INR 10000, for the period of 20 years, you will get Sum Assured of only approximately from INR 100000 to INR 200000, which is very less. How amount of the Insurance cover and individual should have. I have discussed this in detail in my article Are You Really Insured.
4. ULIP does not serve purpose of Investment as it should be:
The most important purpose of any Life Insurance Policy must be to provide adequate Insurance cover to the dependent of the policy holder. And ULIP totally fails to serve this purpose. And I would say this is the most important failure of the ULIP
5. ULIP neither serves the purpose of Investment also:
In ULIP Insurance company invest the premium paid by the customer in the Mutual Fund which they run. But that purpose is also not properly justified. As mentioned before, most of the premium paid is reduced due to huge charges and very little amount is available for investment. Secondly due to ignorance of the customers, they cannot properly decide whether their premium should be invested in Equities or Debt as per their choice. And one more, there is very less liquidity for their investments as they can hardly touch their investment during the policy term.
6. For Insurance the best product is the Term Insurance, and not ULIP:
What you basically need is Term Insurance it gives Cover of INR 5000000 with the premium of INR 3000 to INR 5000 depending on your age. Simply spend this amount every year and get the cover which is adequate.
7. For Investment the best product is Mutual Fund:
Yes! As I always say Mutual Fund is the best Investment available today, and it can cater to different Investment needs of the different situations. The better idea would be to invest in Mutual Fund instead of paying premium for ULIP. In that case one can get more return on investment and also with the flexibility of liquidity.
I always believe, ignorance can never be the bliss. And your ignorance is the biggest gain for the insurance companies who always promote the ULIP products. They never tell you that you actually need Term Insurance. Insurance and Investment are two important aspect of life and for that you need to simply follow point numbers 6 and 7 above.
Thanks for reading this article and hope it helps you to know you better what ULIP is and why you should avoid that. If you really like it, you would be happy to share it!!