'Know your ULIP before investing'

MUMBAI: It's back to business for insurance companies. With the government confirming the status of Unit Linked Insurance Plans (Ulips) as insurance products, investors are once again going to get calls from insurance advisors proclaiming the virtues of buying Ulips. Sure, the Insurance Regulatory and Development Authority's (IRDA) renewed efforts to make these products more long-term in nature and provide greater insurance cover in them may serve investors better, but investors still need to educate themselves better about Ulips if they don't want to be shortchanged by crafty insurance sellers, say investment experts.
‘‘It is high time we get back to focusing on investors since the government has made it clear that Ulips would be regulated by IRDA. Ever since the Sebi-IRDA turf war broke out, everyone has made the issue into a mutual funds versus insurance companies face-off. But the real issue is about investor protection because some advisors were mis-selling these products on false promises and factual misrepresentation,'' says a wealth manager, who doesn't want to be quoted. According to investment advisors, there are several instances where investors were sold Ulips as investment products with false sales pitches like one doesn't have to pay premium after three years, one can take the money out of the scheme at any point of time, assured high returns from the stock market and so on.
‘‘A pure-term insurance is the best way to buy insurance cover, but most people don't opt for it because they don't like the idea of not getting any money back. That is why they opt for traditional insurance products which offer around 6% returns. Now, a new bunch of customers want even higher returns. That is why they are going for Ulips, which have the potential to offer higher returns because they are linked to the market,'' says Sajag Sanghvi, a Certified Financial Planner (CFP). However, he adds that these products are suited only for people with a long investment horizon and with prior experience of investing in stocks.
One of the most tricky things about Ulips is that unlike a mutual fund scheme, you just can't walk out of them anytime if you are not satisfied with the performance of the scheme. This is because Ulips deduct a higher percentage of your premiums (as high as 60-80% in some cases) in the first few years as upfront commission for agents. If the market tanks for some reason in the same period, it would take long time for you to even recover your investment. Also, the expense ratio of Ulips work in your favour only if you stay invested for a long period. This makes the process of exit very complex.