ULIPs v/s traditional policies
The main issue starts with the fact that ULIPs opted for honesty. Nobody wanted to know what traditional policies charge. ULIPs made the mistake of making the charge transparent. Policyholders were taken aback by the high amount of fees that ULIPs charged not realising that traditional policies too charge high administrative and management expenses.
This can have a bearing on returns as well. A ULIP may charge you upfront but thereafter, all the returns on the fund are yours while a traditional policy may charge less but share a smaller portion of returns with you.
So, if you were substituting a traditional endowment with a ULIP, you would be better off with the latter since you would know your charges and your returns.
ULIPs v/s MFs
ULIPs can go hand in hand with instruments like Mutual Funds (MF). Vivek Khanna, Director Marketing at Avvia India Insurance, says, “We feel that a person must hold both, an MF and a ULIP in his portfolio. An MF will serve a short term need and ULIP the longer term one.”
ULIPs and MFs differ largely in their charge patterns. Mutual funds charge an entry load of 2-2.5 per cent on every investment plus an investment management fee of similar proportions. As against that, ULIPs charge a high fee of around 20-25 per cent in the first year of the policy. This tapers down as the years go by.
Investment consultant Ajay Bagga gives his view, “None of the ULIPs have been around for a period of 10 years and hence it is difficult to compare their returns with mutual funds. However, assuming both ULIPs and MFs give the same returns, it can be said that ULIPs will compare with MFs in the long term, as far as charges are concerned.
We did some number crunching to verify that claim and found the truth to it.
|Instrument||First two years’ charge||Second year onwards charge||Investment mgmt fee||Fund value after 5 years||Fund value after 15 years|
|Insurance||28.8%||2.8%||0.8%||Rs 56,042||Rs 2,97,936|
|Mutual Fund||2.25%||2.25%||2%||Rs 61,933||Rs 2,86,645|
(Assumption: premium per annum Rs 10,000, no risk cover charges. Both instruments give returns of 10 per cent pa)
And lastly, the reasons that ULIPs are also accused of lower investible amounts than what you’ve put in is also because of the charge pattern. In case of MFs, the charges are lower in the first few years due to which investible amount is much higher. In the long term however, investible amounts are the same.
So yes, ULIPs are expensive, but only in the short term. If the time frame for investment is 5 years or less, stay away from ULIPs.
Conclusion: ULIPs are a victim of honesty and a flawed selling process. There is no transparency and the front-load is never conveyed by the agent to the customer. (This is why we keep telling you to read the fine print!)
So it’s true when they say that in some situations, honesty may not be the best policy