Monday, 7 June 2010

In defense of ULIPs:

I agree wholeheartedly with what Devangshu Datta writes about ULIPs in Value Research:

In themselves, Ulips are not fraudulent; it's just that investors can get far better deals. So this is a classic case of “buyer beware”. If investors insist on buying Ulips, there isn't much more that can be done since there are already ample warning signs in the public space. It is also easy to understand why agents push Ulips - due to huge front-loaded commissions.

Ulips offer a combination of insurance and investment, paid for in an annual lump sum. The insurer combines a term cover, deducts the premium. Then it deducts commissions. It invests what's left in the policy-holder's choice of debt and equity. One good thing is that Ulip allocations are flexible. The same scheme will allow very large variations in the ratio of debt:equity investments.

The second nasty detail is that most Ulips run on an “either/or” basis. If you die, you will get either the value of the term cover or the value of the units, whichever is higher. You won't get both. This means essentially that the insurer is always swallowing a large component of your annual payment.

The reasons why a separate term cover plus a fund portfolio always outscores a Ulip are simple. Term covers have nominal commissions and so do mutuals. Much more money is therefore, actually invested. Second, there's no “either/or”. In the event of the death of the holder of a term cover who also holds a fund portfolio, the nominee receives both the policy payout and inherits the portfolio.

But in the end he did not point out one fundamental reason why ULIPs are still doing good business in India: We Indians are still very much financially ignorant and are not inclined to work towards educating ourselves.

Hoping it would change soon…