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Don't get swept by Ulip talk

By Tinesh Bhasin in Mumbai
July 05, 2009 17:44 IST
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With the Securities and Exchange Board of India abolishing the entry load on mutual funds, sector experts believe distributors are likely to aggressively push high-commission insurance products. The quashing, applicable from August 1, will bring down their commission to less than half of what they earn right now. The result is likely to be aggressive selling of, for one, unit-linked insurance plans (Ulips).

Ulips combine investment and insurance. They also involve high costs. Of Rs 100 paid as premium in the first year, the agent can get as much as Rs 40 of your money. This is charged to the customer under premium allocation charge (PAC). Then there are other charges that eat into the return.

But Ulips still attract. One big reason is, they're sold on themes that appeal to many. For instance, after the markets fell, insurance companies came with products that said they guaranteed capital. Then there are products that say they guarantee returns based on the highest net asset value (NAV). This product uses complex quantitative investment models not easy to comprehend. In many cases, investors do not understand the nitty-gritty.

Here are things your agent might not tell you:

Agents confuse investors: You get a call about an investment product. And told it is not an insurance plan but an investment plan with insurance benefit. You may be told it is a retirement plan or it may even be marketed as a fixed deposit. But, you can only invest in stock or bonds through Ulips or mutual funds, unless directly buying them yourself or through a broker.

Age versus the product: Ulip is primarily an insurance product. If you have adequate insurance, you may not need a Ulip. Also, the need for life insurance decreases as you reach retirement. "There is no sense in buying life insurance at later years if you have retirement years well planned," said a CFP. And, insurance charges get high as the age increases.

Agent says you need invest for only a few years: Agents mis-sell by saying you may not need to pay premiums after three years. This is not true in most cases. Study the brochure and check if the product has a finite tenure. An investor can only make returns from Ulip if he pays premium regularly or stays invested for over 10-15 years. For, only a part of the premiums are actually invested in the first three years. Most of the money goes towards various charges.

The theme is appealing: Study the theme well before investing. There could be other products with better returns. For instance, the capital guarantee products give lesser returns than a bank fixed deposit.

If the product promises returns based on the highest NAV, it will not give actual stock market returns, as the quantitative methods restrict higher exposure to equity.

Play on charges: Some insurers have come up with a Ulip that have no policy allocation charges in the first year. Agents can try to lure you with this. But go through other charges such as policy administration and fund management fees. See if the cost suits you.

Ulips are complex products. If you can't avoid them, spend some time understanding the product before putting money in them.

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Tinesh Bhasin in Mumbai
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