You’ve probably heard of them already — ULIPs or Unit Linked Insurance Plans.
But despite their moniker, ULIPs aren’t sold as insurance products. Instead, agents often pitch these plans as investment products that just happen to extend the benefits of insurance as well. So technically, you get your invested corpus when the policy matures (including some extra money on top), you get tax benefits, and you get a large lump sum amount in the event you die during this period.
And while it’s not always easy to spot a ULIP, there are a few giveaways. Usually, the policy will mature in 10 or 20 years. And the paying term will be restricted to the first 5 or 10 years. They don’t make any guarantees regarding returns. But they will show you projections that will make you believe that your money could grow at 12% annually.
In fact, your agent might also suggest that you can choose to invest your money wherever you like. They’ll give you safe options. They’ll give you aggressive options. They’ll give you all kinds of options — Almost making it seem as if this unassuming product could solve all your life’s problems.
But alas — It’s a sham. Because despite the lofty claims, a ULIP isn’t a good investment product. Nor is it a good insurance product. It’s actually a rather clever marketing ploy.
The first thing you have to remember is this — ULIPs don’t actually make large lumpsum payments when you die. For instance, if you’re paying one lakh in premiums each year, then your insurance coverage would most likely tally up to ten lakhs. It doesn’t matter how many years you keep paying these premiums. It will stay at ten lakhs. At which point you have to ask yourself — Is your life worth a measly ten lakhs? Do you think your family could make do with that paltry sum in your absence?
Unlikely!!! So as an insurance product, it doesn’t offer you adequate protection.
But what about the investments and the projections? Surely your money will grow at 12%, no? Well, it could. But unfortunately, a big chunk of your premiums will never be invested. And that means even if your money grows at 12% annually, you’d still lose out on a fair bit of cash.
So where do the premiums disappear?
Well, to understand that you have to trace the journey of a ULIP. The moment you buy a policy, the insurer has to get your medical tests done. Then, they’ll have to pay the agents. After which, they’ll have to pay the people that will assess the risk you carry. And once they are through with that, a good chunk of your premium will have vanished into thin air. They call this a premium allocation charge.
But after taking away this money, they can finally set aside what’s left and invest it someplace nice.
Actually, that’s not true. They won’t.
As we already pointed out, ULIPs are often pitched as an investment product that offers insurance on top. Almost making it seem as if the insurance bit is thrown in for free. But that’s not how it works. When you pay your premiums, a part of it is set aside to make sure they can afford to make the lumpsum payment in the event you pass away. They call it a mortality charge. So once they deduct this extra money, then they can finally invest what’s left. And all the benefits of compounding will start accruing to you.
But it won’t. Because we haven’t yet talked about the day-to-day management of your policy. Oh lord, the administrative work — So much paperwork, so many numbers, so much money. So every month, they will take a small part of your investment and keep it. Because — Administrative charges.
And after that, your money can continue to grow.
Unless you’re asked to pay a discontinuation charge, or a partial withdrawal charge, or a premium redirection charge, or a switching charge, or a guarantee charge, or maybe, a miscellaneous charge — just in case.
And once you’re through with all this…
Then your money will finally start growing in spades.
Or at least what’s left of it.
Moral of the story — If you’re looking to invest your money someplace so that it offers you reasonable returns and tax benefits, then you have plenty of places to invest this money without having to pay the extra charges.
And if you’re looking for protection, please buy a term insurance policy that offers your family a sizeable sum in the event something happens to you.
And if you have no idea what a term policy is or how to buy one, then maybe you could check out Ditto. We simplify insurance and offer you the best advice you can get. You can book a free consultation now.
DISCLAIMER: This is a guest post. The views expressed by the creator are their own and not that of the trabebrains website or its management. No Trade Brains’ creator is involved in the creation of this post.