Why You Should Not Buy ULIP
Unit Linked Insurance Plan or ULIP is one of the most common plans that people in India invest in. People either buy ULIP knowingly or they are convinced to invest in it. If you are speaking to a mutual fund broker about investment, chances are that the mutual fund broker in Kolkata will tell you that ULIP has many benefits. Apparently, people also find ULIP to be a simple form of insurance that couples up as an investment.
If you are also about to buy ULIP, take a moment and go through the article below. This article will tell you why you should never, yes you read it right, never buy ULIP. Let’s dispel the hype regarding ULIP.
What is ULIP?
As the name suggests, ULIP is insurance as well as an investment plan. Why I don’t recommend it? It is because the plan does not offer the optimal benefit of either investment or insurance. ULIP allows you to invest in either debt-oriented or equity schemes as it is an insurance scheme that is linked to the market.
What makes ULIPs popular?
Since I have been speaking to a lot of people who have invested in ULIP, I have come up with three reasons why ULIP is so popular.
- The primary reason for investment for Indians is to save tax. Hence, the first and foremost reason for buying ULIP is that most Indians DO NOT plan their investment properly.
- We have all faced the situation where one of our friends or neighbors or in the worst case scenario, relatives becomes an insurance agent. They keep pushing you to buy a ULIP. You do not feel the need to go through the details simply because it is recommended by someone you know. As you can tell, it leads to a bad decision.
- I have come across a few people who believe that investing is nothing but spending money uselessly. Hence, they find it better to invest in something that will offer a return as well. They do not even realize that by buying ULIP, they do not even get the best return they can.
Why should you not buy ULIP?
I will explain you with an example of why you should not buy ULIP.
Suppose you are a 35-years old person who is paying Rs. 50,000 annually for an assured sum of Rs. 5,00,000. Now, if you take a look at the table below, you will see the charges that you need to pay when you are investing in ULIP. None of these charges are hidden though. However, you may not even notice that the charges are already mentioned in the policy papers.
Image courtesy: https://bit.ly/324Ko3F
So, as you can understand from the image above, the amount you invest is actually the amount what remains after paying all the charges. You can do your own math here. However, let me tell you that you pay 7% of your total investment amount to pay the charges alone.
At the end of 10 years, your invested amount will be Rs. 5 lakh. However, if you deduct the charges, you will see that the amount you have paid is actually Rs. 4.68.
What should you buy instead of ULIP?
As I told you before, that ULIP is a combined form of insurance and investment. However, I also explained why you should not buy ULIP. What should you buy instead of ULIP?
Firstly, investment and insurance are two different things? If you are planning to buy an insurance plan, buy term insurance. Term insurance is not very different from normal insurance. The only difference is that it is insurance that you buy for your life. So, when someone is opting for term insurance, the person is ensuring that his family does not face financial loss after his death.
Image courtesy: https://bit.ly/2XaLSFO
Even though I think that life should not be compared to financial terms, having insurance saves the family of the policyholder in case the unfortunate event happens. All of us want to take care of our family members. And that is why buying term insurance is the best thing that you can do for your loved ones.
The policyholder has to pay ‘premium’, which is a small amount. The premium can be monthly, quarterly or yearly. In case of the death of the policyholder, the nominee gets the maturity amount. Generally, the maturity amount is a hefty sum of money.
Now, comes the part where you need to invest. Investment offers you something in return. If you invest in mutual funds, you have the least probability of facing a loss. What is mutual fund investment? Suppose you want to invest a small amount. There are many other investors who would like to invest small amounts as well. So, the company pools the small amounts from every investor either monthly or annually. Once the company accumulates the amount, it invests that money in different stocks, commodities, and bonds.
Image courtesy: https://bit.ly/2JkSBYD
Generally, mutual funds are handled by industry mutual fund advisors. They have knowledge about the market and they can calculate the risk factors. So, you practically do not need to know much about the market to invest. Besides, it has been seen that mutual funds offer better long term benefits than ULIP. If you ask a mutual fund advisor in Kolkata, the expert will tell you that it is good for you. Especially if you are willing to invest only a small amount of money and get a decent return from it.
It is best to utilize both term insurance and mutual fund. While term insurance insures the future of your family, a mutual fund offers you a decent return on your investment.
A piece of advice:
No, I am not asking you to follow what I say. Rather I encourage people to do their own research before investing. When you are paying for insurance, it is an expense. When you are buying a new smartphone, don’t you treat the expenses seriously? Similarly, when you are buying insurance, it should be a calculated expense. Insurance and investment, no matter how overlapping they seem, are two different things altogether. Mixing these two up will only make the situation worse for you.
Generally, companies allow you to buy insurance with a free trial of 15 days. If you are unsatisfied with the insurance you bought, you can return the plan within the first 15 days. Occasionally, you may realize that the insurance is not working for you after 15 days. In that case, I would suggest you buy another one instead of the old one. Yes, you will have to bear the loss that the previous one will incur. But you can save a huge amount of money in the long run.