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Tuesday, March 03, 2009

Stay Away From ULIPs

Our views on mixing insurance and investment can be summed in two words: DON'T EVER! The lure of Unit Linked Insurance Plans (ULIPs) is in its convenience - it combines insurance with investment. But what may appear as convenient may not make sound investment sense.

A common misconception is that the entire amount you pay is invested by the insurance company. Not so. From the premium paid, the insurer deducts charges towards life insurance (mortality charges), administration expenses and fund management fees. So only the balance amount is invested. Also, ULIPs have very high first year charges towards acquisition (including agents commissions). In order to evaluate the return generated by a ULIP, you need to take into consideration only that portion of the premium that is invested in a fund. This information is not easy to come by.

You will not know which stocks the fund manager has invested in, which sectors he is betting on, how concentrated his portfolio is and how it appears at any point in time. Neither are you aware of his stock picking capability and how strong his research team is (if he has one).

You must be able to compare the returns with similar products in the market. Also, with a ULIP, you have to block your money for long periods of time. So you sacrifice on transparency and liquidity.

For the tax benefit, opt for an ELSS. Here too you get benefit under Section 80C and the investment is locked only for three-years.

If you have already invested in a ULIP, you might as well stick it out. Because all the charges, which could be as high as 60 per cent in the first year, begin to taper from the fourth year onwards. So you will have to stick on for at least 10 - 15 years to make sure you get a decent return on your investment.

The high costs, difficulty in evaluation, lack of transparency and low liquidity don't make a ULIP a sound avenue to put one's money. Its the agents who benefit most since commissions can go up to 25 per cent. Insurance should never be an investment.

source: Value Research
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