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Personal Finance

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?

  • manish says:

    >Hi,

    nice blog I wud say! great work!

    I just have one query regarding ULIP. Do you have any idea if top-ups on ULIPs(upto 25% of premium) are tax-free or not.

    Please reply back at singhal.manish@gmail.com if possible.

  • Deepak Shenoy says:

    >Thanks manish – top ups are also tax free, as far as I know. Unless your specific ULIP company thinks otherwise…

  • Anal says:

    >Hi Deepak,

    Considering the fact that companies like HDFC give 24 switches free per policy year, if a person well versed with equity market do you think he can make more in long term than mutual funds? And can you please explain me why you think so?

    You can answer me on anilnadgouda@yahoo.com, anal14@gmail.com.

    Nanal

  • Deepak Shenoy says:

    >actually a person well versed with equity markets will make more money buying stocks 🙂

    But yes, while the free switches are interesting, they are almost always unused. Looking at last year most peopel I know switched AFTER May 10, not before it – and switched back only when the market recovered to its highs (november).

    If you’re consistently good, you might be able to use ULIPs better than funds – but honestly, the front load is so high that any number of switches will make you a loser in comparison…

  • Mirror says:

    >Hi Deepak,
    Many of my collegues have opted for a scheme of LIC -money plus. they need to invest 20k per year for 3 years i.e 90k total. and they will get something in order of 15 Lakhs in the 15th year.what is the catch here.???

    -mohit

  • Deepak Shenoy says:

    >Mohit: Money plus is not guaranteed, it’s a unit linked plan. Also you probably mean 30K for three years. Some advisor has given your friends a calculation based on 25% return annualised – which HONESTLY is not going to happen. Take 12% which is hte historical index gain and you get 3.5 lakhs after 15 years….

  • Mirror says:

    >Hi Deepak,
    Thanks for the response.Does that mean that if i can get similar returns if :
    1. invest 90k over three years in mutual funds in a particular ratio of growth:balanced:secured.
    2.invest 90k in ELSS over a period of three years.
    what returns can i fairly expect at the end of 15th year.would it be better than Market Plus.however, i understand that i need to choose the mutual funds carefully. say i invest in today’s top three mutual funds in both the cases.
    -thanks

  • Deepak Shenoy says:

    >Mohit: As I said historical long term returns are around 12% – so even in an ELSs you can just about expect that much…and also in a regular mutual fund.

    Market plus has very high early loads so you will probably get better returns by working with an ElSS fund instead.

  • Anal says:

    >Hi Deepak,

    Thank you very much.

    I think I will go for ELSS plus a term plan.

    Do you think investing in more than 1 ELSS fund (say top 2 or 3)is a better option than going for only one?

    Nanal

  • Mantu says:

    >Hi,

    I have recently invested in an ULIP from ICICI Prudential – Life Stage Assure. The agent has told me that I can surrender the policy after 3rd year and receive the fund values plus a Guaranteed Maturity Addition of 100% on first years premium at the end of 5th year. The policy term is however 10 years. He also said that I do not have to pay any Surrender Charge on this.

    I am quite new to investing. Can you kindly tell me whether the agent is cheating me ?