"How do I buy a Unit Linked Insurance Plan?" asked a friend the other day.
"Well you call an insurance advisor from one of the insurance companies and simply buy it," I had replied.
"I wish it was as simple as that. A Ulip as you would know has, both, investment and insurance features. A part of the premium is invested and another part goes towards paying the mortality charge for the insurance that an individual taking an Ulip receives," my friend said.
"The part that is invested can be invested in 100% debt, 100% equity or various combinations of debt or equity. Most Ulips give an individual 4-6 investment options. I was looking to invest in a Ulip which invests a major part of the premium going towards investment into equity. With regard to this I had called a couple of insurance advisors. Both of them insisted that their plan was the best in the market as far as generating returns was concerned," he went on.
"Other than this I had also spoken to two other insurance advisors on the telephone. They also insisted that their plan is the best in the market. This had left me confused. Who do I believe, when I have four guys telling me that their plan is the best? So I decided to do my own research," he added.
"You know when I want to buy a mutual fund, I log onto one of the mutual fund Web sites and I get the best performing schemes over a three- or five-year period. Other than this there are magazines available in the market that tell me which the best-performing schemes are. Depending on my investment objective I invest in one of the best-performing schemes. But I can't find anything of this sort in the case of Ulips: there's no info that tells me which are the best performing equity Ulips in the market. So there is no way I can find out which are the best performing Ulips in the market," my friend continued, animatedly.
"That being the case, how do I make an informed decision? Also various Ulips have different expense structures. Some have a very high premium allocation charge during the first few years. Others don't. In the first year, 15-71% of the premium can be deducted as premium allocation charge, depending on which insurance company I go to," he said.
"What this means is that if I decide to pay a premium of Rs 50,000 and the premium allocation charge for the first year is 30%, then only Rs 35,000 will be invested. The remaining Rs 15,000 the insurance company will recover as a premium allocation charge. Now I would like to know which insurance companies have the lowest premium allocation charge. There is no source that tells me that either," he claimed, taking a deep breath after his long response.
"Now that's a really complicated situation you are in," I said, trying to console him.
"You know if I had just spoken to one insurance advisor and gone on his word, I would have already invested by now. But since I decided to cross-check, I have ended up in this jam. Although in a way, it's good. I now know how difficult it is to choose the right Ulip. You just can't compare their performance," my friend replied, taking a deep breath to go on with his answer. . .
"And you know what," he said, "there are a few other things I realised during the course of my research. As you would know, every mutual fund scheme needs to have a benchmark index like Sensex, BSE 100, BSE 200, Nifty, etc. Now if the returns of the scheme are greater than that of its benchmark index we say that the scheme has performed well. This is done to give the investor an idea as to whether the scheme is performing well due to the ability of the fund manager or the general condition of the market."
"Ulips do not need to have any benchmark indices, which to me is a little surprising. Also every mutual fund has an investment objective. The investment objective gives it the mandate to invest in a particular category of stocks. The mandate might be to invest in large-cap stocks, mid-cap stocks, small-cap stocks or any combination of these. This tells the investor the kind of risk the mutual fund carries," he said.
He wasn't finished yet. "A fund investing in only large-cap stocks would carry lesser risk vis a vis a fund investing only in mid- and small cap-stocks. Accordingly an investor can make a decision whether or not to invest depending on his risk appetite. In case of Ulips there are no investment objectives. So there is no way an individual can figure out the amount of risk a particular equity Ulip carries," came the realisation from his side.
He had thus decided not to invest in Ulips and stick to mutual funds.
"At least in case of mutual funds you can compare and invest in the best funds," he concluded.
