7 reasons to avoid a ULIP

One of my NRI clients recently mentioned that his father-in-law was talking about the booming insurance market in India and how several people had approached him with some great insurance products that offered handsome returns.

He thought even my client should buy one. The best part was that the father-in-law was 6 years old! but then who cares.

Insurance companies have a bestseller in the form of unit linked insurance plan! "#I$. %s far as they are concerned! the only thing that matters in this plan is whether the person can pay a premium for the ne&t three years. 'ven if a 6 -year-old feels he doesn(t need insurance! the agents of these companies will try to sell it to her) him.

*ut something that sells well isn(t necessary great and we all have come across several e&amples of this. +hen one opts for an insurance policy or a financial product! what is important is not whether it is a bestseller but whether it is suitable and relevant to one(s needs.

,imilarly! whether I-I-I $rudential! *a.a. %llian/ or any other company is number one is immaterial.

Here(s another thing to keep in mind -- don(t invest in a "#I$ .ust because most of the policies that are sold are "#I$s. The product you invest in should be the one that best suits your needs0 and this need not necessarily be the most popular ones.

The primary purpose of insurance is to ensure the well being of your dependents in the event of your untimely demise. ,o why are we saying that you should give "#I$s a miss1

Here are some reasons2

3 In the initial few years! the costs of servicing your "#I$s are very high. They vary from 45 per cent to 65 per cent depending on the scheme and company chosen by you. +hat this means is that! if you invest Rs 466!666! only Rs 75!666 865 per cent cut9 to Rs :5!666 845 per cent cut9 will remain for actual investments after deducting charges.

3 The cost of insurance keeps increasing every year as per your age. ;or e&ample! if you are paying a mortality charge 8that part of your premium that goes towards covering your life9 of say Rs < when you are 76 years old! this figure can go up to Rs < by the time you are =6. %nd it keeps going up. The worst part is! since these amounts are deducted from the units! you do not see the impact of these charges on your N%>. +hich is why a lot of people don(t realise this happens.

3 ?pa@ueness of charges2 Aifficult to really understand the charges with so many charges under different heads. To understand this better! read (+hy "#I$ is not the best insurance product(.

3 In any e@uity linked insurance product! fund management skills play a very important role. *ut the best fund managers in the Indian investment industry and in the world are found either working for mutual fund houses and not in insurance companies.

3 +hen investing in insurance! investors do not have a choice to change funds mid-way if the investments don(t do well. In other investment options! investors can sell and move to a different investment.

3 *eware before you buy such bundled products 8a mi& of insurance and investment9 like "#I$s. %sk yourself would it help if you keep your insurance and investment needs separate. +hile investment needs primarily seek decent returns! insurance needs are meant to protect your family or dependents in case of your death or permanent disability.

3 Remember! your insurance needs go down as your wealth increases. It helps to have a term plan that you can @uit at any time without worrying too much about surrender charges and how much will you lose if you e&it later. If you stop a "#I$ plan in between! you pay a part of your accumulated money as charges for stopping the premiums. This is known as the (surrender charge(.

How to choose the best insurance policy

These are some of the common concerns that you should look at before putting your money in "#I$s.

Needs-based analysis of your insurance needs

%ssess your and your family(s needs and make a calculated assessment.

Some important things to keep in mind

#oans to be paid off The kind of lifestyle you want to provide to your family Bour non-working spouse 8if relevant9 who wouldn(t have an income if you were to die Bour child(s education and marriage e&penses $roviding for your parents! if they are financially dependent on you

?nce you determine the above factors! you run the following calculations

4 Lumpsum capital needs on death

a. -learing home loan

b. -learing car loan

c. Aaughter(s ) son(s education

d. Aaughter(s ) son(s marriage

e. 'mergency funds in case of your sudden death) permanent disability

. !onthly income needs

a. Conthly household e&penses

b. Conthly income of you and your spouse

c. ,hortfall! if any 8calculated as your monthly) yearly e&penses less income9

7. a. -urrent invested assets 8e&cluding residence! car and other personal assets9

b. -urrent life insurance coverage

c. Total D a E b

d. ,hortfall D 8lumpsum capital needs on death9 E 8monthly income needs9 - Total

Interested in investing1 Fet your basics right

?nce you determine the amount of life insurance you need! .ust buy the cheapest insurance policy available in the market. Term insurance policies are generally considered the cheapest as they do not promise you any returns. The premiums that you pay go to cover the mortality charges.

Cost "#I$ agents and companies tell their potential cleints that insurance is a long-term product and the higher costs charged by "#I$s in the initial few years should not be see as a deterrent to investing in "#I$s. The stress is obviously on the word long-term.

*ut don(t forget what Gohn Caynard Heynes! the great economist! had once observed! (In the long run! we are all dead.(