I have a simple rule of not to mix investment with life risk coverage. It is easy to get lost that ULIPs have triple advantage of Life Cover + Critical Illness Cover + Benefit of Aggressive returns offered by the Equity Markets. Lets analyze each of these.
Life Cover: Sure they do cover it. However, if you are employed, most employee insurance should cover this risk. Fine, assume they don’t, then you can go ahead and purchase “Term Life Insurance” which costs way too less and is also eligible for Tax benefits on the premium you pay.
Aggressive Returns: Assuming you opted for 100% equity in your ULIP, then here is what data suggests on the returns delivered by ULIPs [For comparison sake, we have been recommending HDFC Funds in Mutual Funds, so lets take ULIPs from HDFC itself] HDFC Life – Equity Managed [ULIP] has given returns of just 12.5% in the past 3 years while HDFC Top-200 has managed to yield 19.5%.
Things not in favor of ULIPS are:
- 90% of the agents I have spoken to just mis-canvas the product as they want to sell. ULIP expense charges are as high as 28% in the first 2 years [Agents make the most money here]
- In case of ULIP, you do not have the option for changing the fund – from HDFC Top 200 to say HDFC Growth Fund etc, if the fund manager you have opted for under performs
- Illness benefits come with lot of caveats and fine prints and coverage doesn’t begin immediately.
- Companies don’t disclose Portfolio of Investments regularly [Once in 3 to 4 Months]
- You can’t average daily or weekly to take advantages of spikes in market
- IRDA is the regulator for ULIPs and doesn’t come under the purview of SEBI and hence all this stupid practice of CASH deposits being accepted towards premium payments. [We are honest tax payers and good citizens, hence we don’t like this]
So what we normally suggest and practice is to BUY Term Life Insurance to cover risk and opt for aggressive investment in Mutual Funds like HDFC Top 200 or Reliance Growth Fund by SIP. Even after adjusting the amount paid for Term Life Insurance, we are getting better returns than one can get from ULIP. In a way of speaking, we are making money as well as covering risk.
Now addressing the Critical Illness Benefit – it is like a lottery, that if you were to have a heart attack after 3 years of subscribing to ULIP then you beat our Investment strategy of “Term Life Cover + Mutual Fund” because you get lumpsum paid by the insurance company. This is the only benefit I see from ULIP, but who would ever want to have a stroke or an attack 😉