Though agents promote Ulips instead of term policies, the latter make more sense for pure insurance purposes.
Sanjay Khatri, a young telecom professional, was recently purchasing a life insurance policy.
While scouting for the right product through different agents, he found that a large number of agents were very gung-ho about Unit Linked Insurance Plans (Ulips).
"The returns are very good and you get both investment and insurance on a single policy," he was told. On cross checking with his friends, he found that some of them had also bought similar policies.
With his mind made up, he approached his financial planner to scout for a Ulip that matched his age profile. But to his surprise, the planner shot down the basic idea to buy a Ulip.
The advice was clear: "No point in buying a policy that is way too expensive and does not provide adequate cover."
When he sought an explanation, here's what he got: Ulips typically charge you a large number of fees. This starts with premium allocation charge, followed by policy administration charge, fund management charge... the list goes on.
Especially, in the first year, there is a deduction of about over 40 per cent from your premium.
In the next two years, these amounts come down but it is still as high as 20 per cent. Only in the fourth year onwards, it settles at 4 per cent per annum. Compare this with a pure term policy and the numbers are dramatically different -- a mere 7 per cent in the first year.
Also, Ulips do not give an adequate insurance cover. For instance, a 30-year-old buying a term policy of Rs 50 lakh (Rs 5 million) per annum will have to pay a premium of Rs 15,000 odd per annum while an aggressive Ulip with the same cover would cost over Rs 200,000 per annum.
Says Rahul Aggarwal, CEO, Optima Risk Management Services, "Term policies help people who have modest budgets to get high insurance cover."
So, what makes Ulips attractive? Ulips promise great returns in the long run while in case of a term policy, you do not get any survival benefit. And that is where the sellers get you.
Says Rahul Aggarwal, CEO, Optima Risk Management Services, "Ulips sales are driven by stock market buoyancy." According to him, people who already have adequate term cover and understand stock market risks should only buy these products.
And more importantly, when the insurance broker tries to sell you Ulips, you should simply ask him for his brokerage. A cool 35 per cent in the first year itself. For a term policy, he would barely get 2-5 per cent.
Says Agarawal, "Ulips neither give adequate cover nor are they efficient saving instruments. Since the insurers and the distribution channels have entrenched interest in promoting them, customer education and awareness should become the main tool in controlling fallacious and misleading sales."
Also, Ulips do not allow you to surrender the policy in the first three years. And if you were to do so, the money would only come back after the completion of the third year.
As for the returns, while some companies boast of good Net Asset Values , one can only gauge the actual returns once it is multiplied by the number of units. This is because, insurance companies also deduct some costs from the units that is allotted to you.
In short, remember that the best thing you can buy from an insurance company is "an insurance policy." And for investments, there are always mutual funds and stocks.