Saturday, May 7, 2016

Should I Invest in ULIPs – Yes or No?


If you are someone who has been following this blog, you would already know that I am not a big fan of ULIP products. There have been multiple articles about ULIPs in this blog and even a few articles where specific ULIP products have been reviewed. The irony is, after reading the article where I have clearly explained why investing in some ULIP is a bad idea, there are about numerous queries from prospective investors (via email or comments) who actually want to invest in the ULIP. So, I thought it would be a good idea to write a bit more about ULIPs and hence this article. 

The purpose of this article is to help answer this question – Should I Invest in ULIPs? 

What is a ULIP?

ULIP stands for Unit Linked Insurance Plan and is actually a hybrid financial product that combines Insurance and Investment. Read this article about how ULIPs function 

Should I Invest in ULIPs? 

For a change, I am going to answer this burning question right away and then elaborate the reason why. 

Important Note: The answer below is a general suggestion based on a review of multiple ULIP products that are available in the market. There may be a few ULIPs that could potentially be worthy of consideration and if you know any, please share the details and we could take them up for a more detailed review. 

No, You Shouldn’t be Investing in ULIPs…  

Am sure you are wondering, wow that’s a pretty bold statement and I agree. Yes, it is a bold statement and am pretty sure am going to get a lot of flak from people who either sell ULIPs or are big fans of ULIPs. Anyways, this is my personal opinion and am sure after reading the rest of the article, you might feel the same way too… 

Before we Begin: Actually, some of the reasons mentioned below could be clubbed up but I am explicitly splitting them up to signify the importance of each reason individually. 

Reason 1: Mixing Insurance and Investment is a REALLY BAD Idea 

Many financial experts across the globe agree that Insurance and Investments are two totally separate avenues and combining the two almost always results in bad outcomes. This has been my philosophy too. Buy Pure Term Insurance Products that offer super-high coverage for low rates and then invest in good financial products. The resulting outcome will DEFINITELY be better than that of a ULIP. 

Reason 2: ULIPs are COSTLY 

Keeping aside the philosophical difference that we shouldn’t be clubbing Insurance and Investment for a moment, the MAIN reason why I don’t like many ULIP products is the fact that they are COSTLY. The fees and charges you end up paying during the initial few years are exceptionally high and you will continue to pay hefty fees throughout the life of the product. The MAIN reason why salesmen hound you to buy these products is because they get a big chunk of this fees that you pay as their commission and hence they sell you the product even if they know it wouldn’t suit you. Some of the fees and charges include Mortality charges, Policy Administration charges, Fund Management charges, Premium Allocation charges and so on. 

Reason 3: The Insurance Coverage is NOT FREE 

One of the key selling points about ULIPs is the fact that you get Insurance Coverage along with the investment. Even though this is a true statement, the fact is that you are paying for this insurance coverage and in many cases the amount is much higher than traditional insurance products. Unfortunately, the guy selling the ULIP doesn’t explain this insurance part because if he mentioned that, you probably won’t sign-up for the product. 

In May 2014, a gentleman named Virendra Pal Kapoor won a case against SBI Life Insurance Company. He was 65 years old at the time he signed up for the single premium policy for Rs. 50,000/- which was for 5 years. At the end of the 5th year, he got Rs. 248/- in return. 

The ULIP he bought (Unit Plus II) offered life insurance coverage @ Rs. 3000 per year pear lakh of coverage. The Agent who sold him the product signed him up for 6.25x the coverage which means, every year Rs. 9000+ would be deducted from his invested amount as Insurance Coverage. So, for 5 years he paid Rs. 45,000/- as premium. After adjusting the commission and other fees, SBI Life Insurance returned what remained of his investment which is Rs. 248/- 
This is a classic example of blatant mis-selling and sadly the senior citizen’s savings were eroded due to all this. The High Court of Allahabad actually reprimanded SBI Life Insurance for selling such products and requested IRDA to scrutinize ULIPs more closely. They also ordered SBI Life Insurance to return the investor his money but they contested the case in Supreme Court and nobody knows what happened after that. 

Reason 4: Regulatory Rules are NOT STRICT 

The Insurance Regulatory and Development Authority of India (IRDA) is the governing body that regulates all Insurance products in India including ULIPs . IRDA has been regulating traditional insurance products and if you ask me the Rules & Regulations haven’t been adjusted to cover a complex product like ULIP that also invests in the Stock Market. Not only do the regulations leave much to be desired, the penalties for offenses are pretty much peanuts for the Insurance Companies. This is the primary reasons these guys come up with crazy ULIPs that have absolutely no interest whatsoever in the investor or his future and focus solely on selling something and making profits. 

Reason 5: ULIPs aren’t the ONLY Tax Saving Option

The biggest selling point by most insurance salesmen who try to sell you ULIPS is the fact that you get tax savings of up to 30% of your investment every year. If you invest Rs. 1.5 lakhs this year, you will get a tax refund of Rs. 45,000/- right away and they try to convince you that you are getting this money back from tax authorities because you invested in this ULIP. 

Though it is true that ULIP investments offer tax benefits under Section 80C, the fact is, there are many other investment products that offer the same tax benefits and are much more suitable to your individual risk appetite.

I have published an article that outlines all of the tax saving avenues and also a book that you can purchase that can greatly help you reduce your tax liability. Click here to learn more about the book. 

Reason 6: The Guaranteed Returns Concept is Mostly BS 

Some of the ULIPs nowadays have started Guaranteeing a certain % of your investment NAV at product maturity. Though this may sound like a good/safe investment option, if you look into it further, it’s actually more of marketing tactic than anything else. The guarantee being offered is mostly BS and nothing more. 

Firstly, the Guaranteed highest NAV is usually for a date that is at least 2-3 years or more prior to the maturity date. Secondly, the fund manager will explicitly move all your investments to Debt from Equity for the last few years to make sure the company isn’t going to spend money in guaranteeing your returns. By doing this, they are pretty much compromising your returns because, if you invest in debt instruments via a ULIP, after we deduct all the charges, your returns barely makes 5% in a year. 

I checked a few ULIPs that guarantee returns and they guarantee an average of about 150% of your investments in the first 5 years by the 10th year. Yes 150% of everything that was invested in the first 5 years sounds great but if you do the math, the average returns works to less than 6%. So, the guarantee they are giving investors is pointless. There are other investment options that can guarantee a much higher rate of returns than a measly 6% 

If you ask me, this whole Guarantee thing is a marketing tactic that was put in place to attract the investor who is usually wary of the stock market and to give them a false sense of safety that would motivate them to choose this product which they would’ve ignored in the first place. 


Reason 6: ULIPs are VERY LONG TERM Investments 

Another key selling point for ULIPs is about, you pay premium just for 5 years and you can get back X times money in 7 or 10 years. On paper this sounds nice but if you ask experts, you have to stay invested for at least 10 years or even more when the stock market is doing great in order to achieve average returns of around 10%. The point about stock market doing good is of special importance because, your returns are linked to the stock market and during bad years your investment is probably losing value more than it’s gaining. Plus, with all the fees you pay each year, you would need at least until year 7 or maybe even year 8 to actually break-even (i.e., your fund value to match the total invested amount). So, you got to wait at least another 3-5 years for your investment to actually grow before you redeem - right?

Reason 7: Choosing the Bond or Debt Investment Option in ULIPs is Investment Suicide 

When an insurance salesman is trying to sell you a ULIP product and you mention that you are not so keen on stock market investments owing to risk to capital, their first response is, we have Bond Fund options where your money is safe and grows at an average of around 8-9% per annum fully guaranteed. 
Actually speaking, there is truth to this statement and in fact Bond Funds can generate around 8-9% per year without much risk however the catch here is, not all of your yearly premium gets invested. As mentioned in Reason no. 6 already, if we offset all the fees & deductibles and then calculate based on the actual invested amount versus your yearly premium, the rate of returns work out to around 5%. Even your savings account earns 4% for just simply keeping your cash there. 

If you ask me, there are easier ways to waste money than choose the Bond Investment Option in a ULIP. Apart from paying a lot of fees to the insurance company and a sizeable commission to the agent, you aren’t doing much good anyways. You might as well donate some money to charity, at least you will be getting some good karma against your name that way. 

Reason 8: ULIP Returns are Almost Always DISAPPOINTING 

Actually Reason 8 is more of an offshoot of Reasons 2 & 3 Combined but needs to be mentioned explicitly because almost everyone that has asked me for investment advice starts off with, I invested in a ULIP but the returns are that good. The main reason for the same boils down to the incorrect expectations that are set at the time of selling the product and the high charges. When the insurance agent is selling you the product, he comes armed with a table of numbers worked up under the assumption if you invest 1 lakh per year for 5 years and then your investment grows at 12% or 15% for the next 15 years etc. and then shows a final figure of 1 crore or some super number. For majority of the middle class or working class, the chances of becoming a Crorepati is a distant dream and if a product can potentially make that a reality, anyone would get tempted. 

Sadly, the truth is, not the entire 1 lakh gets invested and this fees/deductions part that isn’t earning anything for you eats into your overall returns. Even in a good market year, after offsetting the usual fees/charges that get deducted, the overall returns generated would probably be in the range of 8 - 10%. If this is the number for a good market year, imagine the plight of an average year or worse a bear market? This is exactly the reason why almost all investors who choose ULIPs get disappointed when they see their annual fund statement. 

Reason 9: The Salesman Worries MORE about his Commission than Your Interest

This is the hard truth which we have to live with – PERIOD. The guy selling the ULIP products is a Salesman and is selling a product that offers him the best commission/fees. If today XYZ ULIP offers good commission he will sell it and if tomorrow its ABC ULIP, he will make the switch. You don’t have that luxury of switching. Once you Invest – you are stuck for the next 5 years or more and you cant even consider an early redemption. Early redemption would mean you have to forget at least 40 or 50% of your investment or maybe even more. 
If those salesmen put the interest of the Investor (YOU) first, would they be selling ULIPS with a 30% first year fee and 100% equity exposure to a guy in his 60’s? No, they won’t but sadly finding such a salesman in India is pretty much like finding an honest politician. 

So, you have to think about what is best for your financial future. The guy selling these fancy ULIPs wont and if you don’t, NOBODY else will. 

Some Last Words:

Even though most people who invest in ULIPs end up making losses, we usually don’t share such bad experience with our friends & colleagues because we are afraid of what they would think about us if they found out that we made a bad investment choice. The truth is, everyone makes mistakes and it takes a lot of courage to admit our mistake and help prevent our friends & relatives from making the same mistake that we did. I know a lot of my friends who have lost a lot of money on costly ULIPs and that is one of the main reason why I am very much against ULIPs that charge hefty fees. 

There could be potentially some very good ULIP plan that charges minimal fees and may be a great investment choice. But, those are very rare and not marketed much because low-fee ULIPs basically mean lower commissions to the salesmen and those guys aren’t keen in marketing such products. 

Its our hard earned money and its our responsibility to be cautious when making Investments. Lastly, please do share this article in Facebook/Twitter so your friends and family members could learn more about ULIPs and be cautious when they are approached by an insurance salesman. 

Happy Investing!!!

If you disagree with the points in this article or have had a Good/Bad experience with ULIPs, please feel free to share your thoughts in the comments section. 



4 comments:

  1. Great article Anand. Cam you please let us know if the ICICI Elite Wealth is a better ulip than others

    ReplyDelete
    Replies
    1. Let me try to write something about ICICI Elite Wealth

      Delete
  2. Anand Sir.. I follow you through Moneycontrol and always read you blogs.. very interesting and full of valued information that you keep giving in regular intervals.. gr8 initiative.. thank you very much.. have one small querry.. is it advisable to go for transfer along with top up home loan.. i have completed 8 years of my loan.. more 12 years remaining.. LIC home loan interest rate is quite high 11.7 compared to other banks between 9.25 to 10.5%.. should i transfer home loan and take top up on same loan as planing to buy a car..

    Thank you again sir..

    ReplyDelete
  3. Very good article. cant agree more
    i have invested in ULIPS around 2010 and completed 5 years. currently i have stopped my investment. Quitting is loss at this point of time so i am holding ULIPS for long term

    do you think it;s a good idea to continue investing in ULIPS till maturity?

    ReplyDelete

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