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.

Insurance

While doing financial planning we always talk about taking an insurance policy. Usually financial advisors would ask you to take the types of policies

1) Life
2) Health
3) Home

I am not talking about car, is because the law forces you to have one anyway.

Now let’s look at Life. The insurance agents usually will show you a range of policies, from wholelife, moneyback, etc. and they talk of riders, to take care of health, accident, etc. But what is best for you? First let us try and understand what is life insurance? Life Insurance is usually to take care of your loved ones incase something happened to you. So it would be best to take a policy, which would take care of the financial needs of you and your family in case something happens to you. You should not look at insurance as an investment.

Before we go into anything lets see how insurance works. Insurance does not protect you against something happening to you, it covers the consequence of an event. So if that is the case, why should we look at is an investment to get something in return. You should buy an insurance hoping the event does not happen, but if does happen. The reason for which you have taken the insurance will be taken care of. The premium you pay, is an expense to buy Peace of mind.

Basically what happens when you buy an insurance policy with a return of money? The insurance company breaks up the premium into 2 parts. One risk premium and another investment. The risk premium goes as expense to buy you peace of mind. Then investment premium is invested and what you get is return of your investment premium. So why should you ask an insurance company to do investment for you?

The core competency of an insurance company is not investment. You have scores of investment companies. Also check the historical returns of the same amount of investments with an insurance company vis-à-vis an investment company. The returns you get from an insurance company have always been less. So the best thing to do is go in for term insurance only.
Term insurance provides insurance for a specific period of time, or “term”. Term insurance provides only “pure” insurance protection and does not have the savings or investment feature. This type of insurance offers the users a choice of terms from 1 year renewable up to 30 year terms. The premium for the term remains the same throughout the term; the most popular nowadays is the 20 year term. In certain cases you can also opt for a term to a specified age, usually 65.