Should You Invest In ULIPs?

Unit Linked Insurance Plans or ULIPs offer you a combination of both investments and insurance. As is the case with most insurance plans like ULIPs, which give you money back after the policy term the returns are low.

How is returns from ULIPs determined?

The money that the fund gets is first allocated to various charges and the balance of the premium is invested in instruments depending on the choice of the investor. Let's say you have paid a premium of Rs 1 lakh in the first year.

Should You Invest In ULIPs?

The company would deduct all charges and invest the balance depending on your choice. Say the balance is Rs 95,000 and you opt for equity funds. If 100% is invested in the stock market related funds, you could get returns based on how the markets move. If you have invested in debt funds, your returns could be based on general interest rates in the economy. You can also balance the investment with partial investments in equity and debt in case you want to hedge risks.

The problems with ULIPs

Unit Linked Insurance Plans provides you an insurance cover up to 10 times the premium paid. So, if you are paying an annual premium of Rs 1 lakh you have an insurance cover of Rs 10 lakhs.

However, your returns are poor in the initial years because of various charges like policy administration charges, mortality charges, premium allocation charges etc.

Another drawback is that the insurance at 10 times of the premium paid is just not adequate.

Just imagine you pay Rs 1 lakh as the premium and you get a cover of Rs 10 lakhs only. If you are a non smoker and 30 years of age, a term policy of 10 lakhs, might cost just Rs 5,000 or lower. So, really ULIPs can tend to give you poor returns as well as inadequate insurance cover.

Therefore your insurance cover is poor and the returns over 5 years can also be poor. If you really want to reap returns you should invest for more than 10 years.

A longer lock-in period then ELSS

Unit Linked Insurance Plans tend to have a lock-in period of 5-years. This means that it is higher than the lock-in period of ELSS, which is just three years. Also, if you are withdrawing your money after a period of 5-years, you will not get the insurance cover. So, it is better to keep the ULIP until the expiry of the period, whicch could either be 5 years or 10 years.

Income tax benefits

One of the advantages of investing in the ULIP is that one gets tax benefit under Sec80C of the Income Tax Act. If you hold to maturity, you are also entitled to tax benefits on the income earned. So, there are two tax benefits that investors gain.

Should you invest in ULIPs?

This product is really a mix of investment and insurance. It does not give you adequate insurance, nor does it give you enough returns because of the various charges. A better bet would be a pure insurance policy or a pure investment plan.

This is similar to an endowment policy in a life insurance plan. Investors who have a long-term view of 10 to 15 years may reap some returns, however, if you withdraw the amount just after 5 years, you might not get the desired returns. Of course, one of the big advantages is that you get tax benefits.

Another advantage is you can choose your investment, whether equity or debt depending on the risk that you are willing to take. In any case it is advised to hold an Unit Linked Insurance Policy for 10-years also.

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