ULIP’s

Now a day’s, I should not be saying now a day’s but some months back, many insurance agents used to keep saying buy ULIP’s as an investment cum insurance. While the market was going up it made a lots of sense investing in ULIP’s. Definitely they were better than endowment or moneyback policies, which gave very low returns. In endowment or moneyback policies you do not have an option as to where your money would be invested.

The returns in ULIP’s are market driven and you have a choice of deciding where you would like your money to be invested, depending upon your risk appetite. Having said market driven, we need to understand how they work. Remember ULIP’s are long term investments.

In most of the ULIP’s you need to pay premium only for the first 3 years after that you can withdraw the money. But it is usually after 3 years that the real returns start coming.

One of the main drawback is in the initial 3 years the initial charges are very high, after 3 years the charges come down. So if you go by what the insurance agent has told you and invest only for 3 years and after that withdraw, you would not have got much benefit. If your plan was only 3 years, then mutual fund would have been better.

The advantage of ULIP’s is long term investment. Though in the initial years the administrative charges are high almost 25 to 40%, they start going down after the 3rd year. Here the administrative charges are even below those of mutual funds, which keep charging 2 to 2.5% every year. In the long term, these small charges make a big difference.

Another huge advantage with ULIP is most of the companies offer 2 or 3 free switchs per year between plans. Also you need to check if they have a feature like top up. In case you get a raise or bonus, and would like to invest the money, check if the company has a topup facility.

So seeing the advantages, what age bracket should go for ULIP’s? As we have seen, you need to look at it as a long term investment. Therefore assuming a retirement age of 60, the persons who should go for ULIP’s are persons upto the age of 40.
Remember the premium amounts for ULIP’s are quite high, so only if you are sure of being able to keep investing for 20 years, go for it.

Note that the charges I have written above are just examples. Check with the insurance company, before investing. In case the charges excluding mortality charges after the 3rd year are above 2 to 2.5% do not invest in it. In that case it would be better to go in for a pure term plan and invest the balance in a good mutual fund.