Why I won't buy ULIPs

90% (heresay number) Around 95% of all insurance policies being sold in India are Unit Linked Insurance Plans (ULIPs), mainly due to distributors’ hard sell and the bull run in stock markets. The little realised fact is that ULIPs are nothing but a mutual fund and an insurance plan bundled together. Of course, the cost to the buyer is much greater than the unbundled product i.e. it is much cheaper to buy plain vanilla insurance and a mutual fund separately.

Insurance sellers say things like “for the long term ULIP is the best product”. Ask them what they mean by long term. Chances are they will say 5 years or more. Not true! ULIPs are cost effective only if held for more than 12-13 years. And for anything shorter than 10 years these are atrociously high priced products. Consider this…

From the first year premium ULIPs deduct anything between 12%-75% as premium allocation charge. In subsequent years (typically up to year 5) anything between 2-10% of your premium gets deducted. This is not all. There are mortality charges (which are used to fund the life insurance and also charged by vanilla policies), policy administration charges (flat rate of about Rs.50 pm), fund management charges (0.5% to 2.5%) etc. These are the mandatory charges. Of course there are many others too. The killer, though, is the surrender charge. This is levied if one wants to withdraw form the policy relatively early (typically within 5-6 years). This is not just another charge, after this one needs health insurance. Read this carefully - for early withdrawals the surrender charge can be as high as 30-75% of the accumulated fund in the investment account.

In my opinion it is better to buy plain vanilla insurance + a mutual fund separately, unless one is sure of staying invested for 15 years or more. If you still want to buy ULIPs, buy a plan from ICIC Pru. I have been told by a reliable source that, from a cost efficiency perspective I-Pru has the best plans. Of course, the return on the investment fund depends on the performance of the fund manager which one knows only with hindsight.

Disclaimer – I have no interest in how you put your money to work or any interest in promoting mutual funds or ICICI pru. Please consult your investment advisor before making any investment.