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Thursday, September 29, 2016

ELSS vs ULIP

ELSS or ULIP

Savers sometimes think of ELSS funds and ULIPs as alternatives. This is a mistake

 

Functionally, there is nothing common between ELSS funds and ULIPs. It's a basic rule of saving to not mix up insurance and investments. ELSS and ULIPs are two different products that serve different purposes. While ULIP is a mix of life insurance and investment offered by life insurance companies, ELSS is an equity fund. Both are eligible tax-saving investments but there the similarity ends.

 

ELSS have predictable cost, and easily understandable returns and are transparent about how the fund operates and what it invests in. Not so with ULIPs. From the premium paid, the insurer deducts charges towards life insurance (mortality charges), administration expenses and fund management fees. So only the balance amount is invested. ULIPs have high first year charges towards acquisition (including agents commissions). In order to evaluate the return generated by a ULIP and thus compare it with another investment, you need to take into consideration only that portion of the premium that is invested in a fund. This information is not easy to come by.

 

In a ULIP, the mix of investment and insurance prevents savers from having a clear cost-vs-benefit understanding of either of the two components.

 

Also, with a ULIP, you have to block your money for long periods of time. So you sacrifice on transparency and liquidity. In theory, ULIPs have a five year lock-in, but since terminating the policy early returns adversely, in effect is a ten to fifteen years commitment.

 

All the charges, which could be as high as 60 per cent in the first year, begin to taper from the fourth year onwards. So you will have to stick on for at least 10 - 15 years to make sure you get a decent overall return on the investment you have made.

 

The high costs, difficulty in evaluation, lack of transparency and low liquidity don't make a ULIP a suitable avenue to put one's money. It is the agents who benefit most since commissions can go up to 25 per cent. Insurance should never be an investment.



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