ULIPs or Unit Linked Insurance Plans is a type of financial product which gives you the insurance benefit as well as it's linked to the market like a mutual fund. That means when you pay a premium (monthly or yearly), some part of that money goes towards the insurance and some of them goes towards market linked instrument. So that means you get the insurance benefit as well as you get the market returns. Sound great right. Let's go through some of the advantages of ULIPs
ULIPs helps people to get insurance and get into the market. Yes, most people just don't buy insurance because they feel that it's waste of money as they will not get anything in return. With ULIPs, they are getting the money back as well as they are getting insured. Along with this, people are getting invested In the market which they usually don't invest directly.
The returns you get are tax free which is again a great thing, you don't have to pay taxes at all from ULIPs.
ULIPs has a little lesser time period, that means you are paying for say 10 years but you get the insurance cover for say 30 years.
Now with these advantages you might think that Isn't ULIPs great as well as better product versus just a plain term insurance. This is what Insurance Sales Person will say and make you believe that it is the best product in the market. But this is not true at all. Let's Understand.
As per ULIPs selling point, it gives you both benefit Life Cover as well as Growth of the money. But it's actually not true. Little surprise right. Say for example an individual have invested in a ULIP plan which gives you 10 Lakh Cover and your money you invested in ULIPs grows to 12 lakh. If a ULIP holder had died, he should get both right i.e. 10 Lakh + 12 Lakh but it is not true. In ULIP you will get only one of the two whichever is higher, in our example the ULIP holder family will get only 12 Lakh. And let's say you have taken a Term Insurance Separately and Mutual Fund separately then you will get both the benefit but in ULIP you get only 1.
The Life Cover of the ULIP is quite low. The primary objective of a Life Cover is that the family of a earning member should take care or themselves if anything happens to the earning member. With less life cover, it is not possible so that's why ULIP doesn't fulfill the true purpose of the Life Insurance. So if you really want to get a good life cover for your family, the best option is probably just a plain term insurance.
ULIPs charges a lot of fees. Every financial product has it's fees, but the ULIP is among the top. My ULIP of 10 years has given me just 2.36% returns. This is because some part of ULIP premium goes towards the insurance, a small portion goes towards investment and that's why your overall return reduces. Because the entire money you have put doesn't goes to the market.
The ULIPs are tax free which is an advantage and not a disadvantage but there is a clause. Tax free is only applicable if your premium is less than 2.5 lakh rupees a year.
ULIPs have a lock in and thus you cannot touch your money even if there is an emergency.
ULIPs have a higher premium. This is true because it gives you insurance and moneyback. But let's say an ULIP holder loses his job and cannot pay the amount, his/her policy will be discontinued and the ULIP holder will get very less amount back because of the charged. But in the same time since the price of term insurance is low, he can continue paying that along with that he can get the mutual fund money back when he need.
Miss Selling, ULIPs are mostly sold because of the miss selling. The sales person sells it by saying you will get 20% returns and what not. But ULIP is not an investment product and it will not give you this much return. Mis selling happens because the agents are incentivized really well to sell it to you. The commissions are really high and because of that they wanted to sell ULIPs.
And because of these many reasons ULIPs are the worst investment product. Instead of ULIP people should invest in Term Insurance separately as well as invest in market separately and should not combine these two products. Term Insurance has lower premium and gives you higher life cover and in the same time Mutual Fund investment gives you great returns, so why compromise by taking the ULIPs.
