ULIP: High charges, low returns!

PRASHANT Shetty*, 32, works as a web developer in a media company and has been in the profession for six years.

He wanted to save tax. So, his friend, an insurance agent, suggested that Prashant invest in a Unit Linked Insurance Plan (ULIP).

The friend told Prashant that the policy would yield 'good' market-linked returns and would also take care of his tax investment needs. He only needed to pay a premium for three years.

So, Prashant bought a policy. Let's take a closer look at the details.

Sum assured	Rs 100,000
Policy tenure	20 years
Yearly premium	Rs 10,000
Current value in the fund	Rs 6,115

Today, Prashant is unhappy with the product because the current value of his fund is Rs 6,115, even though the premium is Rs 10,000.

Read: Insurance + investment + tax = bad combo

Where all the money went

ULIP combines insurance and investment; you can choose whether to invest a portion of the premium in debt or the equity market.

What usually fails to come to light: the high charges imposed by insurance companies. This could be anywhere between 2 to 100 per cent!

This amount takes care of the company's distribution charges, the agents’ commission, etc. But not many investors know about this.

"No doubt, insurance companies do mention the charges in the product brochures. But some agents may conceal information. Or they may not explain it clearly to investors. Even investors do not enquire about it," says certified financial planner Arvind Rao. What Prashant pays:

Policy charge in the first year	26.5 per cent
Deducted amount	Rs 2,650
Actual amount invested in equity	Rs 7,350

To add to his plight, the fund underperformed. So, Prashant now wants to discontinue the plan. Is this a good idea?

What agents don't tell you

Prashant was asked to pay a premium for only the first three years. Why? This is because the agent's commission is higher in the first three years.

In the bargain, Prashant is losing out. If he wants to withdraw his money after three years, he will not get much in hand, because the charges are usually higher in the first three years; this eats into a major chunk of the premium.

If the agent claims that the policy will continue even if you stop paying the premiums after three years, this means that the premium amount you paid in the fund within the first three years, will be used to keep the policy in force after you stop paying premiums! Once the amount in the fund is exhausted, the policy will automatically expire.

The road ahead

"If Prashant wants returns, he should stay invested for at least six to seven years and continue paying his premium beyond three years. On the other hand, he could just pay a premium for another two years and then surrender the policy. In this case, the returns may not be impressive due to the high front-end charges in the initial years," says Rao.

Rao's advice to investors, "It's always better to keep insurance and investment needs separate. A term plan could take care of the insurance needs and a mutual fund for investments. But if an investor is still tempted to buy a ULIP he or she could look for low front-end charges offered by insurance companies."

Smart advice

• When buying a ULIP, ask about all charges involved.
• Track past performance of the ULIP (if applicable) before buying a policy.
• Compare ULIPs of various insurance companies to arrive at the best plan.
• You could pay your premiums in smaller chunks every month through a Systematic Investment Planning (SIP) approach. This would save you the hassle of paying a lump sum.
  

Read:

Sell your insurance to raise cash

*Name changed to protect identity.