ULIPs or Unit
Linked policies are a variety of life insurance where a part of the
premiums you pay are invested in stock market instruments. To get a more detailed
description of ULIPs please refer to our earlier blog . The stock markets are
rising and the SENSEX and Nifty are at never seen before highs. ULIPs are back
with a bang and every insurer has more than one offering.
So should you buy a ULIP?
The simplest life insurance product one can
buy is a term plan. However as everyone is aware if you survive the duration of
the policy, nothing is returned to you. Because of the fact that ULIPs have a
savings element attached to them, ULIPs can help a purchaser maintain a
periodic savings habit. The risk attached to the savings portion is equal to
the risk of investing in mutual funds. This being said there are several
important caveats before you buy such a policy.
Caveat 1: The investment risk in the investment portfolio is borne by the policyholder.
What this means is that while the chances of an upside in your portfolio exists
because of a general rise in the stock market, or the savviness of the
insurance fund manager, you stand an equal chance of not meeting your
investment goals and ending up with less money than what you invested. This is
unlike an endowment policy where bonuses are generally declared, though the
rates may be meagre.
Caveat 2: The policyholder will not be able to surrender / withdraw the monies invested in linked insurance products completely or partially till the end of the fifth year.
It is important to be aware that there is no liquidity in the
first 5 years, and though your obligations to pay premiums continue, you cannot
withdraw any of your funds.
Caveat 3: The entire premium is never invested.
There are several deductions that
apply on your premium before it is invested. The first is allocation charge.
This charge is primarily used to pay commission to the distributor and to
defray some part of the initial expenses in issuing a policy. These can range
from zero to a total of 15% in the first 3 years. Then there is a policy
administration charge which is a fee deducted to manage your policy year on
year. These can range from zero to a total of Rs. 100 per month. Each of the
funds will carry a fund management charge (maximum of 1.35% of the investment
amount). In all cases a mortality charge which is the amount of premium
required to cover death risk is also deducted.
Caveat 4: Servicing is not free.
Unlike other policies any transaction that you effect within your
policy is chargeable. Such servicing includes switching between funds, partial
withdrawals, premium redirections and so on.
Caveat 5: Fund performance can vary widely even within the Company for different funds.
It is necessary for you to
study fund performance before you buy such a policy. Average CAGR (Compound
Annual Growth Rates) of funds can vary. Most policyholders are inactive fund
managers, preferring to forget about any insurance policy once purchased. Lack
of vigilance can give a nasty shock after 20 or so years at maturity.
This being said, ULIPs have been
cleaned up considerably after Regulatory intervention. Charges are now
reasonable and policy brochures are less complex. Earlier if a policyholder had
lapsed his policy, hardly any amounts were returned to him. Currently if a
policyholder is unable to pay premiums for the full 5 years, amounts are not lost,
because companies have to mandatorily operate a Discontinued Policy Fund that
provides a guarantee of 4% return. These amounts are paid the moment the policy
completes 5 years.
Our view therefore is to buy a ULIP
only if you are able to keep track of your funds, because you are responsible
for your investment decisions and the company has already disclaimed
responsibility for investment performance. If you decide to go ahead, you will
find all the key information on www.policylitmus.com
to help you choose the best policy for you.
