Before signing up, we need to be aware of the various features of Unit Linked Schemes which are sold by insurance companies such as ICICI Prudential Life Insurance, HDFC Standard Life Insurance, Birla Sun Life and many others in partnerships with banks.
To summarise the message of this post ...... Stay away from Unit Linked Schemes. I am yet to find out what the benefits really are, other than the fact that these Equity Lined Saving Schemes (ELSS) count towards the Rs.100,000 mandatory deductions for tax filings. I was a fresh graduate from IIM Lucknow and was filing my taxes for the first time, when a Citibank relationship manager coaxed me into subscribing for a Unit Linked Insurance Plan (ULIP) with the following features.
1. An assured return of 10% every year (assured return was only 3% when I read the policy document)
2. An unheard off insurance cover which turned out to be only 6 lakhs (woefully short of the 50 lakhs plus cover I was looking for)
3. She also said that I could make this my retirement plan and would leave me with enough savings to last me a lifetime.
I signed up for the same however the actual features of the scheme turned out to be as follows.
1. You need to pay a fixed amount very year, which may be split in monthly, quarterly or half yearly instalments. The tenor also ranges from 5 to 25 years. In my case I signed up for a Birla SunLife Policy paying Rs.60000 every year for 20 years.
2. There is a commission which is charged by the Insurance Company for the first 3 years. In my case 60% of the Rs.60,000 (Rs.36,000) in the first year, 7.5% of the Rs.60,000 (Rs.4,500) in the second year and 5% of the Rs.60,000 (Rs.3,000) in the third year was the money I lost upfront by signing up for the policy (i did not realise it then though). This money (Rs.43,500 over 3 years) is retained by the insurance company and is lost for the customer as you cannot exit the policy for the first 3 years. Some relatively better policies charge lower rates of commission, but the lowest I have seen is ICICI Prudential which charges 25% in the first year. A part of this commission is paid to the partner bank (and also as incentive to the Relationship Manager) which sources this policy. It is another issue that the bank officials are completely unaware of the policies they are recommending and are driven by those that give them the highest revenue.
3. In addition to this, from the remaining yearly investment, policy administration fees and insurance charges are deducted which amount to a couple of thousands every year. The remaining amount which was Rs.20,000 for the first year gets invested in a mutual fund and will keep growing with the NAV of the Mutual Fund. Policy Administration charges are similar to Fund Management Charges and the Insurance Charges are counted towards the Insurance Cover which I get on signing up for the policy which is Rs.6,00,000. It rarely exceeds Rs.15,00,000 for most of the ULIP’s I have reviewed till date.
4. The Insurance Cover you get ranges between Rs.5,00,000 to Rs.15,00,000 and is woefully inadequate if you are a working individual. You are better off with a pure life insurance policy from LIC.
5. The amount which is invested in the market also does not grow in line with expectations as I have observed that fund managers from Insurance companies are not as good as Fund Managers from Mutual Funds. My Mutual Funds give me much better returns than the ULIP Fund.
2. There is a commission which is charged by the Insurance Company for the first 3 years. In my case 60% of the Rs.60,000 (Rs.36,000) in the first year, 7.5% of the Rs.60,000 (Rs.4,500) in the second year and 5% of the Rs.60,000 (Rs.3,000) in the third year was the money I lost upfront by signing up for the policy (i did not realise it then though). This money (Rs.43,500 over 3 years) is retained by the insurance company and is lost for the customer as you cannot exit the policy for the first 3 years. Some relatively better policies charge lower rates of commission, but the lowest I have seen is ICICI Prudential which charges 25% in the first year. A part of this commission is paid to the partner bank (and also as incentive to the Relationship Manager) which sources this policy. It is another issue that the bank officials are completely unaware of the policies they are recommending and are driven by those that give them the highest revenue.
3. In addition to this, from the remaining yearly investment, policy administration fees and insurance charges are deducted which amount to a couple of thousands every year. The remaining amount which was Rs.20,000 for the first year gets invested in a mutual fund and will keep growing with the NAV of the Mutual Fund. Policy Administration charges are similar to Fund Management Charges and the Insurance Charges are counted towards the Insurance Cover which I get on signing up for the policy which is Rs.6,00,000. It rarely exceeds Rs.15,00,000 for most of the ULIP’s I have reviewed till date.
4. The Insurance Cover you get ranges between Rs.5,00,000 to Rs.15,00,000 and is woefully inadequate if you are a working individual. You are better off with a pure life insurance policy from LIC.
5. The amount which is invested in the market also does not grow in line with expectations as I have observed that fund managers from Insurance companies are not as good as Fund Managers from Mutual Funds. My Mutual Funds give me much better returns than the ULIP Fund.
My advice to you, if you are contemplating Investment in a ULIP is as follows. Do not link up your Investments and Insurance. Keep them separate.
1. Better to go for a pure risk Insurance Plan rather than going in for a return oriented plan. A pure risk plan is you get a fixed cover ranging from Rs.10,00,000 to Rs.1,00,00,000 in event of death and you pay a fixed annual premium for the same.
2. Mutual Funds which have an entry load of 2% are much better for investments than ULIPs which have a minimum entry load of 25% in Year 1 and higher entry loads than MFs in Year 2 and Year 3 as well. The damage done in 3 years cannot be recovered in the next 5 years even if you have a superb fund manager for your ULIP. You would be better off investing in Mutual Funds in the first place.
2. Mutual Funds which have an entry load of 2% are much better for investments than ULIPs which have a minimum entry load of 25% in Year 1 and higher entry loads than MFs in Year 2 and Year 3 as well. The damage done in 3 years cannot be recovered in the next 5 years even if you have a superb fund manager for your ULIP. You would be better off investing in Mutual Funds in the first place.
I am yet to break even on the amount invested. Find attached the Excel Sheet that I maintain to track the performance of my ULIP. You will realise how I have lost money on the same.
If you want any policy to be evaluated before you signup for the same, you can feel free to write to me at Ask.Pranav@Gmail.com and I will try to revert to your query within 48 hours.
1 comment:
Hey Pranav,
I have taken a ULIP from Max Newyork in Dec, 2006. I have the same thoughts as you have. The agent actually promised the moon when he explained the policy. I fell flat. Now I have no option other than continuing with it.
I feel sad that I did not do proper research about the ULIPs before taking it. I regret that. There are so many people out there ready to grab your money.
Nice blogs. I keep reading them regularly.
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