UNIT Linked Insurance Plans (ULIPs) are policies that club insurance with investment.
Besides getting your basic insurance cover, ULIPs offer between four and six options when it comes to choosing the investment mix.
These range from funds, which invest in 100 per cent equity to those that invest in 100 per cent debt securities.
wealth offers pointers on ULIPs to help you make a well-informed decision before investing in this product.
Higher charges:
ULIPs have something called the 'premium allocation charge'. This means, the company charges a percentage of the premium towards the premium received. For instance, if you are paying a premium of Rs 45,000 per annum, you are charged a premium allocation charge of approximately 15 to 71 per cent on this amount. The net premium, after deducting this charge, gets invested.
This charge, usually, depends on the ULIP chosen. And remember: your per annum return is calculated on the money invested and not on the premium paid.
A significant proportion of this charge is passed onto an insurance agent as commission. From the third year onwards, most ULIPs have a premium allocation charge anywhere from two to five per cent.
Choosing the best ULIP:
When it comes to mutual funds, you can find the best performing schemes through research.
But this is not possible with ULIPs because each plan will differ in terms of the expenses you need to pay upfront. This means that you have to go with what an agent tells you.
Unlike mutual funds or other investment instruments, generally an insurance agent cannot sell products from different insurance companies. He has to sell only those products that are issued by the insurance company he represents. In this scenario, unbiased advice is rare.
Compare 'n' contrast before you invest:
Though most insurance sellers tend to make tall claims about the return-generating potential of the product, the Insurance Regulatory and Development Authority (IRDA) has specified that a rate of 6 per cent per annum and a rate of 10 per cent per annum, are the only two rates that can be used to forecast the return potential. So, before committing to any particular ULIP, check what else is on the menu.
What products are being offered by competing insurance companies? Keep it conservative by directing the advisor concerned to use a return of 6 per cent per annum over the entire tenure of the policy, to ascertain the maturity value of the policy. This way, all expenses will have to be necessarily factored in.
At the end of the exercise, you will have a much better picture in terms of the strengths and weaknesses of competing offers.
The bottom-line:
ULIPs are not a bad investment, per se. But they are products, which help you break even after six to eight years. So, think long-term.
If used as short-term investments, your financial health will suffer.
Thumb rule: Get all the information before you invest
