Sunday , 25 June 2017

ULIP hoax

Make Rs 6 lakh in 6 years
A guy bought a ULIP Simply because his dad insisted (on the agent’s recommendation), he bought a life insurance policy– a unit linked insurance plan (ULIP). It would save him tax, the agent had said!

Now, the only thing that he understood about the ULIP was that he would make Rs 6 lakh in 6 years! Thanks to his insurance agent, he wrongly believed that a ULIP is a tool to make fast cash.

What’s the premium outgo?
He pays an annual premium of Rs 30,000 every year and has paid three premiums so far. Today, he is left with less than Rs 60,000. Thanks to two things which the agent never told him:

- Charges
- Volatile stock markets

The nitty-gritty:
First things first, let’s get the concept of ULIP clear. It is a combination of plain life cover with a component of investment thrown into it. Out of your total premium, some part is set aside for the insurance cover and the rest is invested. You can choose to invest in an equity fund or a debt fund. Depending on your risk appetite; you can take a call.

If you choose equity, the money will be used to invest in the stock market whereas in a debt fund, the money will be used to invest in government securities or bonds. He chose a balanced fund that invested in a mix of both debt and equity. He paid Rs 90,000 as premium so far, but the balance in his fund is just Rs 60,000! And now, he is contemplating on withdrawing this money before it dips any further.

The low balance in his funds could be attributed to the high charges, which Angelo had to bear.

ULIP would be incomplete without the mention of charges, which forms a major part of this product. The charges are usually high in the first three years, which could be anywhere between 20 to 100 per cent in the first year! Every year the charge comes down but dramatically from the fourth year onwards.

Let’s say you pay a premium of Rs 10,000 and the charge on your policy in the first year is 40 percent. So, Rs 4000 will be deducted from your policy towards the charges and the remaining Rs 6000 will go towards your fund and your life cover.

Volatile stock markets:
He did not know the risks involved in buying a ULIP that invests partly in equity. He invested in the fund advised by his agent and expected to make a quick buck. This is what most investors do. It is important to know that when investing in equity, there is no guarantee that your money will grow immediately. Equity investments are meant for long-term, atleast 7 to 8 years. Only if you have a long-term time horizon, should you consider investing in it

What next?:
If you bought a ULIP to avail tax benefits, but has landed up with a product you doesn’t like. So, what should you do now?

“should stay invested ideally for the whole policy tenure or should consider paying a lesser premium after a few years.” . ULIP offers the feature to withdrahttp://localhost/theequitymarkets/wp-admin/post-new.php?post_type=pagew your fund units after three years, but having this feature doesn’t mean that you have to necessarily apply it . And it does not make sense too, since you are yet to recover your capital investment.

Alternatively,you could consider a top-up option and also look at monthly premium payment option at the same time. This would help to average cost of units.

Top-up premiums are the amounts that a policyholder can invest in the ULIP over and above the regular premium. The charges applicable to top-up premiums are far less than regular premiums – around 1 per cent of the premium amount.

So, should you buy ULIP at all?
“An ideal scenario would be to have a combination of a term plan and a mutual fund. It is best to keep insurance and investment needs separate than opting for a two-in-one plan such as ULIP.”

should not be tempted to close the policy or think of earning returns anytime soon.

Hidden truth equals lies

THE hallmark of a great salesman is that he never lies. What he does however, is sometimes hide the truth which may be infinitely more dangerous. So, never pay attention to what you’re being told, look instead for what you’re not being told.

Every Unit Linked Insurance Plan (ULIP) agent worth his salt will tell you that ULIPs are great investments with great liquidity. You pay premiums for the first 5 years and after that you can withdraw all your money, which is tax free! So, you keep your money locked-in for a minimum of five years as per tax laws till the time you enjoy your tax benefits and then move your money elsewhere.

And you’re ready to hug him and buy instantly because you desperately need a tax haven and liquidity. But hold on to that hug and most importantly that cheque!

What the agent might not tell you is that because of the high front-end charges on your policy, you may not be left with much to withdraw at the end of five years. We’ll show you how:

They charge!
ULIPs are by now popular for their high front end charges. That is, of the premium that you would pay in the first couple of years, the company would charge a heavy fee of anywhere between 20% to 70% on that premium.

Example: If you invested Rs 10,000 as premium, the company would charge between Rs 2,000 to Rs 7,000 and invest only the balance in the first few years. The balance, therefore, could be as low as Rs 3,000. This charge is nothing but the agent’s commission. Then there are other charges like administration charge and fund management charge levied every year. The result: A sum total of all these charges means that it is going to take you quite a while to recover your principal invested, let alone get any returns. A little bit of number crunching tells us that even at a growth rate of 5 per cent every year, it could take you at least 5 years to recover your principal. So what will you exit with at the end of 5 years?

But don’t lose hope. This is what you need to watch out for to make a successful foray into ULIP’s

–Don’t buy insurance if you want to withdraw before five years. The withdrawal option must be exercised only if there is an emergency and that too after all other means have been exhausted.

–Buy ULIP only if you are prepared to lock-in your funds for a long time, that is, at least more than 10 years. Over a long term of 10 to 20 years, your costs will get evened out and the effect of compounding gives you good returns.

–If you want to invest for a shorter term, look at mutual funds, postal savings or even bank fixed deposits. Mutual funds and postal savings also give you tax sops.

–Don’t buy insurance only to save tax. Assess your needs and then take the decision.

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