View quick summary
Almost 70% of all insurance policies are bought in the last three months of a financial year. This indicates that many of these plans have been bought with the sole purpose of tax saving. Majority of buyers don’t care what they are buying as long as it helps them save tax. If you are such a tax payer, be careful when you buy a ULIP. Tax payers must understand that the high cost, complexity in policy and low transparency make it a not so favorable choice for this purpose.
What is ULIP?
A unit linked insurance plan (ULIP) is a type of life insurance plan, the cash value of which varies as per the current NAV (Net Asset Value) of the underlying investment assets. The premium you pay is used to purchase units in investment assets chosen by you.
Here are a few must-knows about ULIPs:
- ULIP makes you invest regularly and for long term, just like a Systematic Insurance Plan in mutual funds. Thus, the chance of loss due to market fluctuations is reduced.
- ULIP gives insurance cover along with investment in equities. If you need a high value insurance cover, term insurance is better as its cost had come down in the past. Also, buying it online makes it cheaper.
- Daily Net Asset Value is declared as per IRDA rules and your investment is controlled by experienced professionals.
- Insurance agents like to lure buyers by saying they can withdraw from their Ulip after a few years. This lock-in period used to be three years but the Insurance Regulatory and Development Authority has extended it to five years. None the less, it is a widely used ploy to sell a Ulip because partial withdrawals are tax-free.
- There are a number of ULIP plans with multiple features offered by insurance companies. The best ULIPs are those which give fund value plus risk cover in case of death.
- ULIPs are more beneficial if invested for long term, at least for 10 years. There is no limit for minimum or maximum investment.
ULIPs: Things to Consider
Still, Ulips are more popular with investors. The bigger loss is that the risk cover these policies offer is so low compared to what an individual needs that it is almost meaningless. What’s more? Since the premium of traditional insurance plans is very high, a policyholder is not in a position to buy more life cover for himself. A term plan for a risk cover of Rs. 50 lakh would cost a 25-year-old man less than Rs. 6,000 a year. A similar cover from a Ulip or an endowment plan would come for at least Rs. 2-3 lakh.
The average insurance cover per policy in India is less than Rs. 1 lakh. One should have a cover big enough to settle all outstanding loans as well as create a corpus of 8-10 times the annual income. If a person’s gross annual income is Rs. 6 lakh, he should have a cover of at least Rs. 48-60 lakh. As they say, “Life insurance should be used as a wealth protector, not a wealth creator.”