Saturday, February 20, 2010

ULIP - What not to do in Investments !!!

Jan-March is the season when heards of investment advisers try to attract your attentions with a bunch of brochures and promises , which will project you as corepathi in a decade or so.I guess these agents give more promises next only to our beloved Politicians and obviously both of them never keep their promise. We have no other option , in both cases ,but to select a few among them .

If you have notice sharply , until last year both mutual fund agents and insurance agents would have tried impress you . But this year its a sole market for insurance agents . So what happened in between ... Until last year there was a Entry load of 2 -2.25 % on all mutalfund investments .It means if you pay Rs10,000 towards mutual fund , Rs 225 will deducted and remaining Rs9775 goes to your units / actual investments . Mutual fund company paid this 225 as commission for the Agents through whom the business came .

SEBI made a ruling last year stating that this hard fixed commission or entry load should be remove and that commission should be based on negotiation between the agent and the customer . Will you ever pay a commission for the person just filling the form and handling it to fund office , when you can do the same yourself either personally or online ? . Unequivocal answer is "No" . Our mind set is that we wont pay a charge explicitly but wont mind if its taken indirectly . This proved to be a death blow to mutual fund agents . They no more get commissions and why the hell should they do a work which wont pay them .

This turned out to be blessing in disguise for insurance agents . Lets concentrate on only one of the product(ULIP) which they sell , actually missell to be precise. So whats a ULIP ..
ULIP Stands for Unit linked Insurance Plan .

Based on Benifit it can be defined as
ULIP = term insurance + mutual fund

Based on cost it can be defined as
ULIP = term insurance + mutual fund + huge charges

what ever money you pay as premium is divided into three portions

  1. Mortality charges or insurance premium
  2. Investments in stocks/bonds
  3. Charges or commission

#1 is used to provide the insurance cover for us
#2 is the investment into stocks/bonds which can appreciate like any mutual fund
#3 charges taken by the insurance house

similar to mutual funds , insurance companies too use this charges to pay commission for the agents who sell them . Now the worst part about ulip is the charges are very very high .
Lets take a example of a decent insurance company and see how ridiculous it is. I am consider profit plus insurance scheme from LIC. Following illustration is taken from LIC's official website

Source : http://www.licindia.in/profit_plus_illustration.htm

In the first year for Rs 15000 paid as premium Rs 3600 is deducted as premium allocation charges and 720 as policy administration charges . So they loot 4320 out of 15000 straight away , whooping 28.8% , from your investments . Most of this money is paid to the agents as commission. For the next 4 year they deduct 6% of your money as charges. Tragic isn't it ? (unless you are insurace agent ) .
Now you should have got the reason why those agents are crazily behind you to get your investments done.This illustration is from one of the most ethical company, owned none other that the Govt of India .So think of other private insurance companies . They sure loot for more .
I personally dealt with a case when one my friend was about to be cheated . It was Birla SunLife Insurance and they were promising a electric cooker for any investments made before Jan 31.
It was hard time explaining to her that "there is no free lunch" and its part of her money coming back to her as bait.

So what is the alternative ..
Never mix up insurance with investments .

For insurance always go for plain vanilla term insurance which will cost very less . say 5-6K per annum 25 Lakh insurance cover for 25 year old . Check the following plan from LIC
http://www.licindia.in/amulya_jeevan-I_benefits.htm

For your investments with tax benefit go for ELSS (Equity linked savings scheme ) which are mutual funds with three year lock in .

What to do if you have already invested in ULIP ?
Sit back and relax ,some mistakes cant be reversed and advice your near and dear like i am doing now :)

PS:
I started a ulip 4 years back paying 5K per month . It was HDFC unit linked endowment plan .Charges were 24% for first two years .In this i lost almost 32K out of 1.2Lakh .

3 comments:

  1. Awesome demonstration. I am starting to love your blogs, da. Here goes my thought - The Term Insurance agent commissions also are of same as of any ULIPs (in some cases higher). Also,the current term insurance premiums in market are nowhere nearer to term insurance premium charged by ULIPs. Another pros, I see in investing ULIPs is the fund switch option available to the user between risk levels. So ULIPs has their cons but not abrupt enough to be rejected

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  2. @Karthi:
    Yea the few pros for the ULIPs are also skewed towards high networth individuals . I am damn sure that atleast 90% of ulip premium payer have no idea of this switching option and dont receive any guidance their agents either.
    Want i want stress in this blog (might have missed to have done ) is the MISSELLING which is happening.I personally took a call in lieu of one of my friend from Birla Sun life and i could sense the clear cheating .When I said a lie that i work for Karvy Stock broking in mutual fund division,he abruptly stopped promises spree and closed of the conversation saying that his staff will meet me personally. Abrupt cheating !!!!

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