What, your, financial, advisor, did, not, tell, you, about, ULIP?

What is the classic sales pitch of a guy who is trying to sell you an ULIP? You only need to pay the premium for first 3 years and you will have the benefits of insurance and gains of capital markets. How much truth is there to this statement. Let us find out.

1. The amount of money deducted towards the fund management in the first 3 years is high and most of the times ridiculously high. This is where the fund company makes most of the money. This is where your so called financial advisor gets the maximum benefit.

2. The agent might have also said that the policy continues even after 3 years where you have stopped your premium payments. What this actually means is some amount of the fund is deducted towards your insurance coverage and this continues until the fund evaporates or the your insurance term ends whichever comes first. Your insurance cover might lapse in between. Did your agent tell about this. I guess not.

3. Benefits can only obtained if you pay the premium for 5-6  years. What you are doing in the first 3 years is paying the expenses of the fund management. Only in the 4th year will you see the real benefits since the charges are already taken care of in the first 3 years. The subsequent years is where your investments see the fruits of investing in capital markets.

4.  On the other hand, to reduce the losses and maximize the benefits you could just pay a premium for another two years beyond 3 years and then surrender the policy. It will not guarantee impressive returns like mutual funds because of the front-end charges involved you can save your investments and get out of it with decent gains or minimal losses (depending upon how the capital markets perform).

Does  concealing important facts like these qualify for a scam? That is debatable but it certainly qualifies for concealing the truth. That is the reason why IRDA has passed new regulations for ULIP’s where the minimum premium term is 5 years and not 3 years. This would help the investors to some extent but they still have to tread some caution while investing in ULIP’s

ULIP to me is a confused instrument and you really need to understand it to even contemplate investing in it. Warren Buffet does not invest in an industry which he does not understand. Why should you and I?