LOSS IN ULIPS............WHAT TO DO???

 

Mr.Bala wrote : “Thank you Mr.Srikanth for your invaluable suggestions and advise through your blogs and facebook updates. Please continue this yeoman service.

I had invested Rs.60000/- in X Insurance company ULIPs after my cousin who is an agent with this X Insurance Company convinced me with the product throughout colorful brochures and PowerPoint presentation.

Sadly, my investment is showing a negative return of 37% and the value is now about Rs.38000/-. The scheme has a provision of Additional purchase. Shall I buy more of the same ULIP to average the same and reduce my cost?”.

SRIKANTH MATRUBAI replied :

Mr.Bala, thanks for your kind words.

It pains me to read such letters. I only hope people realise faster that ULIPs are money minting machines for Insurance Agents and a BIG LOSS for Investors. I repeat again Insurance is NOT an Investment.

Trying to time your investment, be it ULIP, mutual funds, stocks is not a wise thing to do. Investing though Systematic Investment Plans (SIP) which does the Auto timing of the Market job for us is the BEST way to invest.

FIRST UNDERSTAND ULIPS:

ULIPs are Unit Linked Insurance Plans and are similar to Mutual Funds with regards to their structure and functioning. But that’s where the similarity ends.

ULIPs are Long Term Investment Products and you need to stay invested for 10 years at least for you to reap the benefits of ULIPs. But since ULIPs do provide Insurance cover, there are mortality charges and hence part of your investment goes into Mortality Charges for Insurance and only the balance part of your money goes into the Stock Markets for buying Units.

In a ULIP, the insurance component is very very low and does NOT serve the purpose of Family Protection. Due to the many hidden charges like Policy Admin Charges, Allocation Charges, Fund Management Charges, and all types of atrocious charges, ULIPs are designed to ensure maximum benefit for the Insurance Companies and Insurance Agents and NOT THE INVESTOR!!!! The commission is as high as 40%. This commission is paid by YOU and taken from YOUR pocket. are attractively packaged and tempt you but you are the LOSER in this investment avenue.

Look at the charges between Mutual Funds and ULIPs.

1. Entry Load - It can be avoided if you invest directly to your MF bypassing your MF agent.

2. Exit Load - It can also be avoided by remaining invested for certain time period in that particular plan.

3. Fund Management Charge - Its charged as a %age of total assets under the plan. Normally it varies from 0.25% to 2.5% depending upon type of funds (Debt to Equity.) as well as expertise of fund co. for a same set of MF plans, lower FMC Plan is always advisable for investment.

In case of ULIP following 4 types of charge are applicable.

1. Premium allocation Charge - It may vary from as low as 1% to as high as 65-70% of your first year premium& reduced year after year or may remain same at a constant level say 4% or 5%.

2. Mortality Charges = Its the basic cost of insurance & again it varies among Ins. cos.

3. Policy admin charges - Some ULIPs charge as low as 20 Rs. per month where as some charge as high as 200-300 Rs. per month. Again not constant among Ins. cos.

4. Fund Management charges - From 0.5% to 2.5% depending upon the type of Fund (debt to Equity).

There are other charges too like Surrender Charges, Fund Switching Charges,etc, but they can be negated with some help from your financial advisor.

Never invest in ULIPs unless you are investing for more than 15 years. Invest in ULIPs only if the offer is really worthy.

OTHER RISKS WITH ULIPS:

1. When you choose a ULIP Plan, you are marrying to the funds that are packaged with it, if performance of the funds are not good, you got no choice.
2. Since majority of ULIPs are annual premiums, there is a significant risk of ‘market timing’ with ULIPs.
3. 

Insurance is NOT investment.

ULIPs work out well only if your investment horizon is more than 10 years at the least. 10th year is the break even year when ULIP plan takes over the mutual fund. So, an investor needs to stay in ULIP Plan for very long time to beat mutual fund+term solution.

This is because ULIPs have Charges which are very very high, sometimes in the range of even 60%!!!!!

Be aware of these charges.

Mutual Funds are much much better compared especially now that Mutual Funds have 'no entry' load, which makes Mutual Funds very very cheap.

Both Mutual Funds and ULIPs invest in similar assets and thus should normally replicate each others performance. But this is very rare because of the High Charges levied by ULIPs.

MF give you more flexibility. Ulip are are more enforced kind of product.

Avoid ULIPs at all Cost.

Instead take Term Insurance, which is the Cheapest Insurance and then invest the difference in Premium saved into Mutual Funds.

You will make much much more money than investing in ULIPs.

As for timing, there is never a good time or a bad time to start invesment.

Pure Term Plans should be your Top Most priority.

NEVER MIX INSURANCE WITH INVESTMENT:

The Purpose of Insurance is to PROTECT your family in case of any exigencies. The purpose of investment is to BUILD WEALTH.

You are under loss and will continue to be even if the market BOOMS again!!!!

The reason is simple. Your investment is in ULIP. and in ULIP, your investment of 15000 is not invested fully.

40% of this goes to the Agent as commission. Yes, 6000 out of 15000 goes to agent. The money is paid out of your investment and not out of the Insurance Company's pockets.

So, in effect only 9000 is invested. Now just imagine how much the market has to go up just for your 9000 to reach your invested amount of 15000.

IN CONCLUSION :

ULIPs come with lot of inflexibile terms. A very important but often overlooked disadvantage is that if the fund manager stops performing you cannot easily come out of the fund as you have already paid huge charges and remaining invested is your only option.

On the other hand, you can easily do so in a mutual fund as exit loads are zero after a year.

Of course, if you are assuming ULIP also comes with an insurance cover attached, that is wrong. You are paying a fee for the insurance. It is not free.

So, promise yourself, that you will NEVER EVER invest in ULIP.

ULIPs are a costlier, less transparent version of Mutual Fund.

Invest in a Good Mutual fund under the guidance of good Financial Advisor.

Instead of paying 40% commission to ULIP Insurance agent, pay your Financial Advisor a good Amount as Consultation charge.

Best of luck,

Srikanth Matrubai

Declare Existing Ailments while taking Health Insurance

Mr.Ramesh Arvindan asked me "Sir, I want to buy a Health Insurance. I have high Blood Pressure (BP) problem which is however under control with medications and diet. Do I have to declare the same while taking the Policy"?

SRIKANTH SHANKAR MATRUBAI advises :
Mr.Ramesh Arvindan,
It is in your best interest to declare all the health related problems which you are having now and also the ones which you had previously while taking a Health Insurance Policy. This will avoid any future problem when there is a claim.
Suppose you take the Health Insurance without declaring the related health related issues and you get the Health Insurance policy without any Medical tests, especially if you are in lower age group now;  in future, if and when you get hospitilised, it is imperative that you disclose all the past medical issues you have to go  to the Doctor for proper diagnosis and prompt treatment. Now, the Doctor will mention all this in the Discharge Summary. The Health Insurance Company will now get to know that you had avoided the disclosure of material facts while taking the policy and thus will have all the right to reject your claim.
Thus, for a Tension free life, it is in your best interests to disclose all the medical related issues while taking the Health Insurance policy.
Yes, the Health Insurance may reject giving you a policy or increase the Premium, but at least you can be sure that your claim will be settled. Just to save few hundred rupees, it is not wise to avoid disclosing any medical issues.
It will then become a classic case of PENNY WISE POUND FOOLISH or in Indian language, PAISA WISE RUPEE FOOLISH.
Do ensure that your existing disease is filled in the Insurance Proposal Form.
Also, please note all Insurance companies do cover existing ailments after waiting period (though this varies from one insurer to another).
And, yes, some companies do also cover existing diseases depending on case to case.
Most importantly you should also note that it is in your interest to renew your Policy every year to reap the continuity benefits wherein cover for pre-existing diseases are provided.
Note, that if you contact any medical complication after taking the Health Insurance policy, it is not necessary to inform the Company. But for fresh Insurance Policy, it is in your BEST interest to disclose all the facts.
Ultimately, it is in the best interest of the policy holder to follow all the procedures and stick to rules given in the insurance document and not give the Insurance company a chance to reject your claim. Since then, the Regulator, IRDA would step in to protect your rights if the Insurer has rejected your claim wrongly.
Regards,
Srikanth Shankar Matrubai

INVEST JUST RS.100 PER DAY & GET 25 LAKHS AFTER 25 YEARS......GOOD OR BAD??

 
My Clients keep getting these kind of smses and I thought I will clarify the same to you dear readers too..........

One of my clients Mr.Ramesh Savasere asked me...."Srikanth Sir, I got a sms today which read....."invest Rs.100 per day for 25 years and get Rs.25 Lakhs at maturity".....it looks very good to me...shall I go for it"???? I am looking at this investment as retirement option. What do you suggest?
And how much you are covered.

SRIKANTH SHANKAR MATRUBAI replied :

Dear Ramesh Savasere
"Rs.25 Lakhs" looks good to hear. But, will it sound good in 2038..i.e, 25 years hence??.
Your Rs.25 Lakhs at just a Inflation of 8% would be worth only Rs.3,65,000 of today's value. So, is this money enough for your retirment??
Let us first look at how much you are investing.
Rs.100 per day works to Rs.3000 per month, Rs.36000 per year and Rs.9,00,000 for 25 years.
So, Out of Rs.25 lakhs you get, please note that Rs.9,00,000 is YOUR money. This means your investment is earning you a shockingly paltry 4.5%!!!!!!
Yes, the same as your Savings Bank Return.

And how much you are covered. A princely Rs.10 Lakhs. So, your family will get between Rs.10 Lakhs to Rs.25 Lakhs as Insurance in case of your death.
Now, since you are 26 years, for the same Rs.10 Lakhs, if you take a PURE TERM PLAN, your premium would be only Rs.3010 in LIC (in Kotak it is far far lesser at Rs.1971 only). Even if you take the Term Plan in LIC, you are covered for Rs.10 Lakhs and saving Rs.33000 per annum.
If the saved amount of Rs.33000 is invested in PPF/Long Term Bank FD your corpus would be Rs.25 Lakhs.
If you invest the same Rs.33000 in Mutual Funds through SIPs, even assuming a very very conservative return of only 12% , you would still have a  huge kitty of Rs.46,81,000 and at a reasonable return of 15%, you would have a corpus of Rs.75 Lakhs.
And, also this investment would be liquid and you can use at anytime you want.
So, now, I think you are feeling Rs.25 Lakhs is meagre.

Insurance is an expense, not an investment. Do NOT use Insurance as an avenue for investment - you are in the wrong lane. Treat it that way. Life insurance is there to protect your family from financial hardship in case you your no more.
Insurance companies and its agents are doing well mainly because of the ignorance of the policy buyers and policy holders. No wonder so many foreign companies want to enter India.  Avoid pension plans & endowment plans from insurance companies. An insurance policy will not create wealth.

LIC and its agents have brainwashed the Indian public for years that "you should get something back when you buy insurance".
Taking a basic Term Insurance is the BEST Insurance.

The day you understand IMPORTANCE OF TERM INSURANCE - you will be on the road to financial stability.

For pension - the trick is to create as big a corpus as possible before retirement. Once you have created a corpus, you can create pension anytime immediately by investing in immediate annuity.

It is a MYTH that only insurance companies can create pension.

It will be better if you start investing in diversified equity funds via SIP to create wealth. PPF can also play a small part initially and a greater part in the later years.

You can also Get free Life Insurance cover(No Mortality & Admin.
Charges) by investing in Mutual Funds of BIRLA,Reliance, BOI Axa & Kotak.
Birla Century Sip gives you a cover which will be equivalent to your market value of the units you have or 100 times your monthly sip whichever is less.

Under the Century SIP option, if the investor makes monthly SIP instalments, the insurance cover for the first year will be 10 times the SIP amount and in the second year it will go up to 50 times and 100 times from third year onwards, subject to a minimum SIP instalment of Rs 1000 and maximum cover of Rs 20 lakh per investor.   Among the Birla Funds you can consider Birla Sunlife Frontline Equity Fund, Birla sunlife Dividend Yield Fund and Birla Sunlife Equity Fund.
You can read in details here......http://goodfundsadvisor.blogspot.in/2011/09/normal-0-false-false-false.html

BOI Axa also offers Insurance similar to terms Birla is offering.

Kotak Mutual Fund also offers Life Insurance Cover wherein in case of death of Parent, the fund will invest the Balance Sips in the name of the Child. Among Kotak Funds you can consider KOTAK K50 FUND.


Reliance Mutual Funds is also offering Free Life Insurance Cover through SIP Insure.
In Reliance SIP Insure, Reliance will pay the unpaid instalments of the future SIPs in the event of the death of the investor during the sip tenure.

Among Reliance Funds, you can consider RELIANCE GROWTH FUND AND RELIANCE EQUITY OPPORTUNITIES FUND.

In Birla, the Insurance Coverage will gradually Increase^^^^^^^^^
but in Reliance and Kotak, the Insurance Coverage will gradually decrease.
Ideally, one can take a sip in 1 Birla and 1 Reliance/Kotak, this way your Insurance Coverage will be more or less the same throughout.