Money Matters, Simplified.
Unit Linked Plans as Investment Options
Wed, 12/09/2007 - 14:10 by Rajbir
Unit Linked Plans were once hot selling plans of LIC and few other players in India. Especially after the abolition of separate sub-limits under section 80C (earlier section 88, for rebate), investors preference has shifted from conventional insurance policies to ULIPs. As for me, I have always been biased against taking insurance cover, though insurance policies have saved many homes from ruin after unfortunate premature death of bread winner of a family.
My main grouse against insurance policies is that they have not passed the benefit of increasing average age to the investor and it relies too much on exploiting social fabric (reading networking) and high incentives to agents to trick public into policies. When mutual funds, IPOs, Post Office agents get no more than 1 odd percent of investment, why should insurance agents get something link upwards of 30% and sometimes touching 50% and then for life for every installment. This high incentive straightway hits return that an investor hopes to earn.
Even Unit Linked Plans are being sold to gullible investors as they net higher commission; still they are better than Pure Insurance Products. Here are a few key answers you must know before deciding about investing in these.
How it befools a consumer
Unit Linked Insurance Plans typically are a mutual fund type investment where a part of the earnings are diverted towards insuring your life. Part of annual installment you pay comprises of annual insurance premium and balance is invested as mutual fund. Now as the returns on insurance are pathetically low, average returns as worked out by adding mutual fund return and insurance return work out to be better than typical insurance policy; and hence apparently such products appear attractive on the first instance. You are not able to choose the type of mutual fund such as whether diverse of midcap or debt fund etc. Then here the question comes, why not invest yourself part in mutual fund of your choice as SIP and part as insurance premium? At least you would be able to choose the type of fund yourself. The answer is Firm Yes! If you are a bit educated investor then do go for such arrangement. ULIP is for naïve investors and the ULIPs deliver average return only.
These products typically come with a three-year lock-in period. A typical ULIP plan will have the following components: insurance premium towards your life and investments in different asset classes. Some ULIP plans now offer choice of plans as whether to invest only in equities; or to invest in 70:30 equity and debt etc. The buyer is allowed a limited number of switches between the plans.
Typically, in an ULIP plan about 25% of the premium is allocated towards insurance, commission of about 10% in first year (this gets reduced to 5 percent in later years), administration charges of 1.5 % percent are charged.
You need to understand following before subscribing to ULIP
1. Choose proper fund type before choosing a plan.
2. Before you decide no to pay a premium or plan to withdraw funds ensure that there is enough left to cover mortality charges and other administrative charges. The insurance cover may lapse without your knowing it.
3. Try to understand the fund management and return; believe me it is not going to be tough.
Take following precautions
1. Don’t get taken in by past record of a particular scheme. Rather go by the fund manager. Past record of a particular scheme could be an aberration or may be the markets moved that way during a period. Example; when markets rose by about 50% in 2006, any fund that gave just 50% annualized return should be counted as an average fund only and not a progressive one.
2. Don’t buy a ULIP on the promise that you no longer have to pay your premiums after the third year and that you can withdraw funds anytime
Even Unit Linked Plans are being sold to gullible investors as they net higher commission; still they are better than Pure Insurance Products. Here are a few key answers you must know before deciding about investing in these.
How it befools a consumer
Unit Linked Insurance Plans typically are a mutual fund type investment where a part of the earnings are diverted towards insuring your life. Part of annual installment you pay comprises of annual insurance premium and balance is invested as mutual fund. Now as the returns on insurance are pathetically low, average returns as worked out by adding mutual fund return and insurance return work out to be better than typical insurance policy; and hence apparently such products appear attractive on the first instance. You are not able to choose the type of mutual fund such as whether diverse of midcap or debt fund etc. Then here the question comes, why not invest yourself part in mutual fund of your choice as SIP and part as insurance premium? At least you would be able to choose the type of fund yourself. The answer is Firm Yes! If you are a bit educated investor then do go for such arrangement. ULIP is for naïve investors and the ULIPs deliver average return only.
These products typically come with a three-year lock-in period. A typical ULIP plan will have the following components: insurance premium towards your life and investments in different asset classes. Some ULIP plans now offer choice of plans as whether to invest only in equities; or to invest in 70:30 equity and debt etc. The buyer is allowed a limited number of switches between the plans.
Typically, in an ULIP plan about 25% of the premium is allocated towards insurance, commission of about 10% in first year (this gets reduced to 5 percent in later years), administration charges of 1.5 % percent are charged.
You need to understand following before subscribing to ULIP
1. Choose proper fund type before choosing a plan.
2. Before you decide no to pay a premium or plan to withdraw funds ensure that there is enough left to cover mortality charges and other administrative charges. The insurance cover may lapse without your knowing it.
3. Try to understand the fund management and return; believe me it is not going to be tough.
Take following precautions
1. Don’t get taken in by past record of a particular scheme. Rather go by the fund manager. Past record of a particular scheme could be an aberration or may be the markets moved that way during a period. Example; when markets rose by about 50% in 2006, any fund that gave just 50% annualized return should be counted as an average fund only and not a progressive one.
2. Don’t buy a ULIP on the promise that you no longer have to pay your premiums after the third year and that you can withdraw funds anytime