Unit linked insurance plans (ULIPs) & Money-back plans are very popular in India, knowingly or unknowingly most of us have invested our hard-earned money in these financial products. They appear to be highly beneficial & simple for an investor. Today, through this article we will try to understand the hype or myth around ULIP & also explore best alternatives.
What is ULIP?
- An insurance cum investment product
- A market-linked insurance scheme where the money collected through premiums is invested in equity or debt securities
In 1971, First ULIP in India was launched by UTI, which was followed by LIC in 1989.
Considering the opaque nature of traditional or endowment plans, as an insurance cum investment concept, ULIP is a major improvement & better alternative offered by insurance companies. As an investor, you need to understand & know where your hard-earned money is parked. However, in endowment policy, you may have no idea how much premium goes towards insurance as risk cover & how much money is invested for wealth creation or how much return is generated over a certain period. ULIP was launched to increase transparency & remove all the cons in the products offered by the insurance company.
In ULIP there are fund managers who look after your investments, regular updates on NAV, returns earned are provided, you are also allowed to switch between different types of asset type (Debt & Equity) to make the best ULIP combination for yourself & also charges are clearly stated in the offer document.
A major benefit of investing in ULIP over other financial instruments is that
ULIP enjoys EEE tax status
- Tax deduction: An investment made by you in the ULIP is eligible for deduction under section 80(C) upto ₹150000
- Tax-exempt: Returns earned from the policy (If any) & maturity amount received are exempt from taxation under section 10(10D) of Income-tax act
Surely, all the above factors makes ULIP a must have financial product for the investment basket.
But why is ULIP so popular?
- Tax-Saving,
- Mis-Selling &
- Insurance as Investment
These are three reasons that come to my mind & you may also agree with at least one.
- “Kitna Tax Bachega?” India’s buy life insurance with the sole reason of saving tax. So they invest in any suggested product even without entirely understanding it. Real Returns are also ignored in the name of Tax-Cut
- “Insurance Agent is my Brother” Most of the time an insurance agent is our friend, or a neighbour, or a relative. It is very difficult to turn them down & say ‘NO’. Agents push & mis-sell these products so hard, which makes it even harder to ignore them & we end up buying a ULIP
Note: Mis-selling means a deliberate & irresponsible sale of services to clients, even if they don’t have any need for the service. For example, offering a life insurance scheme to an individual with no dependents.
- “Pure Insurance is a waste of My Money” We all see insurance as an expense as we don’t see any real returns. Hence we move towards a product which provides us with some returns later if not claimed. But here we fail to understand the effect of inflation & low returns provided by these insurance cum investment plans.
This brings us to a question, what’s wrong with ULIP?
Answer:
- Neither adequate insurance is provided nor a good investment solution.
- The upfront commission encouraged its massive mis-selling
- High charges to activate your insurance + investment policy.
Lets see each factor closely & understand the reason why a good concept got converted into a scam in Part 2 of this article