Saturday, June 15, 2013

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?”.

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.
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.

  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.
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.

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.
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

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