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ULIP costs – lining advisors pockets

Kartik Jhaveri writes about how you can lose a lot of money by blindly following insurance advisors. (“How Mr. Singh lost 24 lakh just like that“). In brief, Mr. Singh bought a ULIP policy paying Rs. 3 lakh per annum as premium, and ended up paying his advisor 18% of his first years premium – a hefty Rs. 54,000. He could have reduced this by only paying the “minimum premium” of Rs. 20,000, says Jhaveri, and put the remaining sum as a top up contribution. The charges in this case would have only been Rs. 6,800 – that saves Singh about Rs. 47,000.

That 47,000, invested over 28 years, would yield Rs. 24 lakh at 15% p.a. So effectively Mr. Singh lost that chance. So greedy advisors have, says Jhaveri, lined their pockets at Singh’s expense, and even advised him to stop payments of premium after three years, as these are no longer mandatory. In essence, bad advise cost Jhaveri Rs. 24 lakhs.

Unfortunately you cannot blindly follow Jhaveri’s advice either here. Firstly, for a premium of Rs. 300,000 p.a. for 28 years, the minimum sum assured should be Rs. 42 lakhs (0.5 x Term x Premium) – Jhaveri says 15 lakhs is the insurance amount. Let’s ignore that and take 42 lakhs instead.

Also, IRDA has regulated the amount of “top up” contributions one can pay, to a maximum of 25% of regular premium. If any more top up is paid, the sum assured will have to increase to 125% of the portion of top up greater than 25%. What that means is: If Singh had taken a Rs. 20,000 premium policy (28 years), his sum assured would have been a minimum of Rs. 280,000. If he pays a top up of Rs. 280,000 (whatever was left beyond the Rs. 300,000 annual payment made otherwise), then this would be considered as a single premium, and sum assured would increase by about Rs. 345,000, making the total sum assured = 625,000.

Every year of such top up, the sum assured will increase (each top up is considered to be a single premium). But still, this is a better option than a fixed premium of Rs. 300,000 per year, because of the much lower charges.

Unfortunately, insurers don’t even allow you to pay large top ups. I assume this may be because of the extra complexity in having top ups increase the sum assured; whatever be the case, you can’t easily avail of this option.

But there is a better option – Take term insurance and buy an ELSS mutual fund. (Read my article on this) This is a far more transparent option, and will have much much lower costs as explained in that article. In fact, you will end up spending a lot lesser on fees and costs, you will have a much more visible networth (just multiple the daily NAV with the no. of units you bought) and you will get the same tax exemption. The extra effort is in writing two cheques instead of one.

Advisors will always be greedy and try to maximise their revenue, at your expense. “Caveat Emptor” (buyer beware) applies to all of you who buy a product, and buying insurance from an advisor is like asking a shopkeeper which soap to buy. What kind of advice do you think you will get?

Advisors are biased, period. You must question every thing that they tell you about, and do your own research. Even if they are friends of family – it’s not their money, it is yours.

If you have already bought a ULIP, you can minimise your losses and still quit. Read “ULIPs: Stay or Get Out?“.

Also read: ULIPs: A good invesment?

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