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ULIPs : A good investment?

(Some of you have asked for the “basics” of investing – I’m writing an article about this, and hope to have it ready soon)

Meanwhile, I was recently evaluating Unit Linked Insurance Plans (ULIPs) – the idea here is that you put in your money and it “grows” with time. So you also have life cover (i.e. your family gets money if you die) and money also grows at the same time. You get “units” like in mutual funds, and the value of these units grows because the company invests it for you. You also get a tax benefit under section 80C.

That’s a very simple way to look at things. But is it actually better than using other options? What is the real “cost” of such a plan?

I was pointed to http://www.iciciprulife.com/ipru/docs/lifelink2.pdf for a comparison. This is a “single premium” plan (you don’t have to pay every year), with a Rs. 50,000 minimum premium.

Now you need to know – is this plan the best way to go?

Let’s take an example of someone (say Ajay, 30 yrs old) who wants to invest Rs. 50,000. This will include investment amount plus premium for an insurance policy, sum assured of Rs. 250,000. Let’s say Ajay has no problem locking his money in for three years, but wants to exit after three years.

In a ULIP, Ajay would pay (taking the Pru ICICI LifeLink 2 as an example):

– Entry load of 5% = Rs. 2,500
– Admin charges of Rs. 20 p.m. = Rs. 240 per year.
– Mortality charges of Rs. 360 per year .
– Fund related charges of 1.5% (maximiser plan) = Rs. 750.

This means the amount that is paid out as charges is: Rs. 3,850. Money actually invested using ULIP is Rs. 46,150/-

Now if Ajay decided to use ELSS for investment and a term plan for insurance.

Term plan cost (@Rs. 300 per lakh for 2.5 lakhs) = Rs. 750. (most plans have a minimum, but this is just for illustration)

Money left for investment = Rs. 49,250. If Ajay puts this in an ELSS he gets charged:

– 2.5% entry load = Rs. 1,232.
– Fund management (it’s a hidden cost in MFs) @1.5% = Rs. 740

So money invested using ELSS is Rs. 47,278/-

That means, if you use the ULIP route, around 2.5% LESS of your money is invested.

There’s another disadvantage. Let’s say Ajay dies in the third year – How much does his family get?

In ULIP case, the limit is the HIGHER of invested units or the sum assured, in this case: Rs. 2,50,000.

In ELSS+TermPlan case, ELSS is recovered in full, around Rs. 50,000 (Assuming terribly low growth in three years of the invested amount) Term plan pays out full sum assured of Rs. 2,50,000. What this means is the family gets Rs. 3,00,000.

Looking at this, I feel ULIP is not a good option when compared to taking a term plan for insurance and ELSS for investment. (That’s putting it lightly. Frankly, it’s a lousy investment)

(note: tax savings on both schemes are the same)

Further Note:
I personally cannot invest Rs. 50,000 as a single time premium – I would rather choose something that takes 20 to 30 K per year, and grows. For THAT, the ICICIplan is : LifeTime Pension II

But, guess what, in the first year I lose 22% of my money to allocation fees in that plan!!!!

I would much rather choose TermPlan + ELSS. Or TermPlan plus a FIXED deposit.

ELSS has it’s disadvantages too, but those are far overridden by the costs of ULIP. I would actually suggest a regular Equity Fund plus a term plan.

Update (29.1.2006): Manish Chauhan has written an article on this as well, and says with an example that ULIPs aren’t going to return anywhere close to the Term Plan + Mutual Fund option.

Update 2 (3.4.2006):This Rediff article has more on ULIPs vs. Mutual Funds. An interesting read.

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