Last month my friend who is a young software engineer in his early 30’s decided to start investing. I thought all my lectures with him about the compounding effect and early investment benefits were worth it. But, as fate would have it, he went to a private bank to open an FD and returned to his house with a ULIP policy. Realizing this fact, I conducted further research and found out that all the Indian private bank agents are dissuading their prospects from buying fixed term deposits and persuading them to opt for ULIP. In addition, they state that it is a three-year investment with free insurance of — quantity and insured returns on the endowment. This month, even after all the fights between SEBI and IRDA, nothing has really changed in this business. Bank agents continue to sing about the USP of the ULIP as an investment proposal.
Here’s what those agents won’t tell you:
•ULIP is not an investment but an insurance plan with some market benefits.
•ULIP is a very focused instrument for a very specific need, it is not supposed to be treated as a high performance alternative to bank FDs. In fact, it is not even an investment instrument.
•There are no guaranteed returns in ULIPs.
•It is much riskier than the underlying investments, because even if the underlying investments yield negative returns, banks still deduct all administrative fees.
•Combining the above fact with the current slowdown period, the returns of many investors reached -100%, that is, their policy became null and void.
•Most of the ULIP premium paid in the first three years is consumed in administrative costs such as broker commissions, fund manager fees, insurance premiums and other fixed costs. Since the agent cannot receive any commission after these three years, they state that the ULIP is for a fixed period of three years.
So ULIP is NOT right for you if:
•You are in very early stages of your career and do not have many financial burdens
•You already have a good insurance plan either individually or through your employer
•Your only need is good returns on your hard earned money
•You do not want to couple your investments to market risk
• You have the time and understanding to invest in the stock markets and make money.
•Your investment needs are less than 10 years
•You have huge and predictable expenses in the next three to five years
Unfortunately my friend was affected by most of the above points as he is 25 years old, works for a multinational that offers insurance benefits and will be getting married in the next 2-3 years. In fact, most people are affected by at least one of the above points. ULIP is neither a good investment instrument nor an efficient insurance policy, as it cannot match the returns of other market-based instruments nor can it be as versatile as modern insurance covers. It is designed to fool the unsuspecting customers.
-PS: The author is part of the Indian stock picking community and can be contacted at [email protected] or http://www.moneyvidya.com