Unit Linked Insurance Plans (ULIPs) provide you investment and insurance. However, if you try and blend an insurance and an investment product, you might not end-up benefitting from either.
You are trying to do a balancing act, and may end-up neither here nor there. If you want insurance, buy a term plan, which will give you more insurance coverage when you die, than an ULIP. If you want an investment, look for stocks directly or mutual funds, where your entire amount would be invested.
In ULIPS there are a host of charges and the amount ultimately invested is after these charges.
Here are 7 reasons why ULIPs are not a good investment.
Premium allocation charge
First, there is a premium allocation charge, where money is deducted from the amount you pay to meet distribution charges, commissions etc.
This is charged to the fund, which means you have to pay this money and you get units after deducting these charges. So, you end-up with lesser units.
Now to maintain your policy and to remind you and to send you the courier and stuff, there is a policy administration charge. This too is deducted from your premium and than the amount is invested. Ditto like mentioned before, you get lesser amount of units.
Surprised that charges do not end?
This is nothing, but, the insurance amount that the fund house pays to the insurance company on your behalf.
Your nominee may end-up getting 10 times the premium paid as insurance. But, you can get much higher in a term plan. Why do you have to buy ULIP for that? In short, a 20, 30 and 40 year old, can more than 10 times the insurance cover of the premium paid under a term plan.
Yet Another charge!
Out of the money that remains after applying a host of charges, your money is invested. You get expert help for the same, but, you have to pay. If you have decided on an equity scheme, you may end up paying 1.5 per cent, while for a debt fund, the fee is much lesser at 0.75 per cent.
In case you top-up the premium, there are certain charges that will apply on the top-up as well.
What do you end-up losing?
In the first year, you may end-up losing as much as 4-8 per cent of the money invested, depending on your age, due to the various charges.
Even if you end-up making 8 per cent returns after the end of the year, you maybe where you are. But, you do get insurance cover.
In the subsequent years, you may lose lesser.
Tax benefits, an advantage
You do get Sec 80 C benefits for the amount invested in ULIPs. This is one good thing and an advantage.
The other advantage is that the income earned after the lock-in period is tax free.