“No Sir, the Old Expensive ULIPs have gone now. The New ULIPs have been launched with much lower charges. You should invest in them." These are the new “in-statements” of the insurance advisors these days who were going ga-ga over the Old ULIPs to be purchased before 31st August 2010 as according to them, the ULIPs will be totally unattractive after 1st Sep 2010. (Obviously, they were viewing the discontinuation of the old ULIPs as a painful extinct of their money making machine).
What is surprising is, how can these guys suddenly take a 180 degree turn on their opinion in such a short time? Must say, they really need to practice a lot to do so.
Anyways, what is more relevant for us is, are the new ULIPs any better for us? Lets have a look.
Lower Charges
The new ULIPs are being marketed with the USP of having “Lower” charges. Now why are the charges lower? Because they are less than the exorbitantly high charges earlier. Something like saying, “Earlier we were hitting you with a Stone, Now we are hitting you with a brick. So you should be happy”. Why should I be happy? I am still getting hit with the charges when I have cheaper options available with me. Or in other words, what I can see is, the “Low” charges of new ULIPs are still higher than the charges of Mutual Funds. So why should I still go with ULIPs?
Mandatory higher Life Risk Cover
IRDA has suddenly realised that any insurance product should have a component of insurance in it and thus the new ULIPs would have a minimum life risk cover of 10 times of the annual premium paid. Again, problem remains the same. If a person pays a premium of Rs. 50,000 then the life risk cover would be Rs.5 Lakhs. Now a life risk cover of Rs. 5 Lakhs is still a very insufficient amount for a person who is paying Rs. 50,000 as premium and would be earning in excess of Rs. 3 lakhs p.a. So new ULIPs lose on insurance front as well. Term plan still remains the best option. For a 30 Year old, a term plan of Rs. 50 Lakh could be available at a premium of just Rs. 8000-8500 p.a. Would be surprised if any new ULIP could match that. So why ULIP then?
Increase in Lock-in Period
“ULIP is a long term product and thus the lock in is increased from 3 years to 5 years”. The investors in our country would give up on liquidity generally for 2 reasons : One is tax saving and other is assured returns. This is why we have successful investments in Banks FDs (for assured returns) and ELSS for tax savings in spite of lock-ins. However, given that after the current DTC, ULIPs will not qualify for tax savings, how good a deal it would be to give up your liquidity for 5 years ? Also, if you decide to invest say Rs. 1 Lakh in the new ULIP this year, then you need to invest this amount for next 5 years. However, you might not get the tax benefit from April 2012. So you will need to pay Rs.1 Lakh for this ULIP and Rs.1 Lakh for the tax saving investments as well. So why ULIP?
Lower Surrender Charges
Again referring back to the point of “Lower Charges” above, my first question is
“Why should there be surrender charges at all?”
Their Answer, “To recover the initial acquisition costs.”
My next question, “Why there is such a high acquisition cost?”
Their answer, “Because we have to pay high commissions to our agents.”
My further question, “Why do you pay such high commissions to agents?”
Their answer, “Because they have to convince a lot for these products. People don’t buy easily.”
And My Final Conclusion is, “People don’t buy easily because there are surrender charges and several other charges which make these products unattractive." So basically this is a vicious circle of Surrender charges which would also sound like the “Egg and the Hen Story." Point is, ULIPs still have surrender charges and thus they would strangle my liquidity.
Minimum Return Guarantee of 4.5%
The minimum return guarantee might sound like a breather to those who are scared of the markets. But in my opinion, this feature kills the long term benefits of ULIPs. The problem with ULIPs was never that it is linked to the market. The problem was with the heavy charges and the way it was being marketed. So introducing this feature would compel the insurance companies to park more money into debt products and thus my dream of creating wealth for my retirement with the help of ULIPs will be shattered to pieces.
To Conclude
In a nutshell, I would say that, though the new ULIPs could be “slightly” better than old ones, they are still not good enough an investment or insurance option. For insurance, go term, get high risk cover at low premium. For investments, go SIPs, get benefits of liquidity, flexibility and still earn good returns in the long term without having headaches calculating surrender charges.
We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh.nidhiinvestments@gmail.com if you have any questions.
(The views mentioned in the article are personal opinion of the author. The readers are advised to use their own judgment and consult their investment advisor before making any investment decisions).
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