Ulips: Only long-term benefits

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ULIP
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Ulips Only long-term benefits
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These products do not suit everyone even though
they are flexible and facilitate investments in
debt and equities. Insurance industry, too,
enjoys its flavours of the season. Earlier,
endowment or money back policies were in vogue.
And now the mantle seems to have been passed on
to unit-linked insurance plans (Ulips). The
former, though, were easy to understand you
just keep paying the premium for the term and
either get a lump sum pay-out or a specific
amount at predetermined, regular intervals. There
was nothing much to understand about the charges,
as nothing was ever disclosed. This, however,
changed with Ulips entry into the insurance
scene. All charges were declared upfront and the
product had unparalleled flexibility. And the
question was asked repeatedly are Ulips good
investment vehicles? The answer, though, cannot
be a simple yes or no. As there is a lot that the
consumer needs to understand before taking a
decision.
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If one were to compare the product simply on the
returns front with other investment options,
Ulips can outperform a combination of term
insurance and actively managed mutual fund
schemes, after 12-15 years. If, instead of
actively managed schemes, we consider index funds
and index exchange-traded funds, then Ulips may
never be able to outperform these. Besides the
return factor, a host of factors may sway the
decision one side or the other.
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Factor 1 In the case of Ulips, the investment
for the entire tenure is going to a couple of
funds available in the policy. Thus, there is a
concentration risk. If the funds do not perform
well for some reason, the entire portfolio will
be adversely affected. The only recourse, then,
is to exit the plan, which beats the purpose of
investing for a particular goal. If investing
through mutual funds or direct equity, one can
always switch to better performing funds or exit
loss-making scrips, fairly easily.
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Factor 2 Suppose the funds are required in an
emergency. In Ulips, you cannot access your
investment for the initial five years, that is
you cannot take your funds out during this
period. Even if one surrenders the policy, the
amount will be made available only after the
five-year period. This problem does not exist in
the case of mutual fund schemes or direct equity.
Factor 3 Ulips work only if a client is willing
to stay with the policy for the long-term.
Investors may find themselves in a soup if they
have entered the policy thinking that they will
pay for five years and then cash out. This has
been the spiel which many agents have used,
giving Ulips a bad name. In case of such a churn,
investors will lose badly. If investors have
short to medium term horizons of upto 10 years,
Ulips are not the products, one should look at.
Factor 4 For achieving a goal, regular
investments are ideal. But in many cases, the
required amount of money, say Rs 5,000 per month,
may not be possible from year one. But even a
much higher amount may become possible as one
goes on and the goal may be possible to be
achieved even by paying for a shorter duration.
In Ulips, agents typically start a scheme with
what is possible. After that, the review of the
goal does not happen and further investments to
meet the goal are not suggested.
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This can be taken care of by the investor himself
in two ways - one, top-up at regular intervals
and, two, take further Ulips as one goes along.
But as one goes along and opts for short-duration
Ulips, then these may not be cost-effective, as
seen earlier. Also, there are limits to top-up
amounts - typically to the tune of the annual
premium. Also, top-ups can be charged up to two
per cent , even in the later years when premium
allocation charges are nil. Along with the why
nots for investing in Ulips are also some factors
that favour the instrument. First, you can switch
between equity and debt funds many times in a
year, without charge. Secondly, the investments
made in debt funds are tax-free in Ulips. These
two are clear advantages. And lastly, these
products, specifically goal-related ones, are
treated as long-term investments. This does not
necessarily happen with direct equity investments
or mutual funds. So, who should invest in Ulips?
The ideal candidate for the product is someone
who has a long-term investment horizon and seeks
simplicity in his investments. Also one must need
the policy components. Otherwise it would be an
unnecessary cost. The investor should be
financially savvy as well to understand the
product and take informed decisions. Else, it
will simply seem like a maze, quite easy to get
lost in!
Source http//www.business-standard.com/article/p
f/ulips-only-long-term-benefits-111050100004_1.htm
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