Sunday, February 10, 2008

ULIP is a Debt Trap

A far as investment in equity markets are concerned, ULIPs should be discarded in the first thought because the equity-unit-linked creates all the confusion and innocent people fall prey.

In the first year, the overhead charges are around 25-30 per cent of the premium paid up in the first year. There is an entry load for the fund, typically around 5 per cent, and management fees or policy administration charges of around 1.5 per cent. Mortality charges, or insurance premiums, are deducted every year, which essentially covers your life. In case of any eventuality, your family gets the insurance amount.

In the first year, the agents get a higher commission paid through the overhead charges, which is the centre point of the debate. The next year, the overhead charges come down between 10 and 7.5 per cent, and from the fourth year onwards, it is 5 per cent. Fund management charges remain static.

As long as there are funds in your account to pay for the premium, your life is covered. If the unit value falls the next year to an extent they don't cover your insurance, you might be told to pay up the insurance premium, or your cover could lapse. Another thing, investments and insurance, they say, should be separated. They offer no guarantee unlike traditional plans which offer 6-10 per cent returns.

Many agents don't dwell on the various charges year on year. Clients are usually told that withdrawals are permitted from the third year onwards and the annual premiums will be taken care by the corpus in the fund. What they don't say is that if there are insufficient funds for payment towards mortality charges, the insurance cover lapses.

A small calculation by any layman will clearly show the loss in ULIPs as compared to mutual funds.

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