THE very mention of financial products invokes yawns from most people. This category is the least engaging and most, given a choice, would put off wading through boring information and tables to the last minute. If it's insurance, there is even more gobble-degook, which means that most would want to get over with it, in the least possible time.
Now, insurance is a security net that once creates for oneself and the family. Most people have, however, looked at insurance products as tax-saving devices and investment products. Insurance companies have been launching product after product, to appeal to the instinct to save, rather than as something that provides security to the family.
Now, unit linked insurance plans (Ulips) have changed for the better and charges have come down. Many people call me to know if the present-day Ulip has become a good investment product overnight. The answer is yes and no. Yes, because the charges have come down. The first year charges have come down significantly in some cases. But the total charges recovered in the first five years can still be 30-40%, on an average, of the regular premium. So, it is lower than what it was, but not very low in an absolute sense.
Comparing with MF + term insurance combination, these products come close and can even be better after 12-13 years (assuming that both MF schemes and insurance funds offer similar returns). But, there is a catch. There is a limit to how much insurance can be taken in a typical Ulip, for a specific amount of premium and age band. It may be 10 times the annual premium or seven times the annual premium or lower or some such imposed limit. So, a person requiring a much higher life cover will still need to look at a term insurance. A lot of people who do not require life insurance at all, invest in Ulips. For them, the mortality charges impose an unwanted cost.
Also, if the past record is anything to go by, then most investors tend to stop paying the premiums or redeem the funds or surrender the policy in the first few years. For them, the cost is higher. In the initial stages, the front loaded costs do impose a huge burden on the fund performance. Hence, this may again not be suitable for many, if we go by the past track record.
So, by elimination, the new Ulips may be suited to those whose investment horizon is close to 15 years or beyond and whose life insurance requirements are in tune with what the Ulip offers. The number of people for whom this may match neatly will be indeed small.
There are two other factors to be considered. One, the premium is invested for a long period in one company's funds. If the funds do not perform, one cannot exit, without the costs involved. That is where a typical mutual fund scheme still scores over Ulips. To start with, one can diversify across fund categories and fund houses. Hence, the fund manager-risk is reduced in mutual funds, to a great extent. Secondly, there is a concentration risk of too much money accumulating in one fund, over time. Again comparative underperformance will extract a huge toll on the investor. But then, which investor goes into these aspects before investing? They are interested in getting over with the onerous exercise in the shortest possible time – which suits the sellers. They display some nice tables and then show some nice, round figures, which could come at the end of the tenure. And then a nudge and a push and they have the form and the cheque in hand! That's not going to change in a hurry, till the investor shows some more interest in his/her own money.
