Thursday, September 27, 2012

Unprofit Plus

Four years ago, I purchased a ULIP plan from Life Insurance Corporation of India. Maturity is 10 years, and policy payment term is Five years. That means, as explained by my insurance agent, I need to pay the quarterly premiums for Five years, and next Five years, I will get coverage without paying the premiums. Great.

In layman's terms, a ULIP is a type of insurance, where the insurer (here LIC) invests the money in equity (Stocks) or debt funds. The value of the policy is determined by the NAV (net asset value) of underlying assets.  For an example, if I pay Rs 1000 as premium, and if the NAV is Rs 10 per unit, they will purchase 100 units on each payment. In fact, they will purchase less than that because, from the premium, allocation charges are reduced. In initial years, they will charge up to 20%, that means they will purchase only for Rs 800, so you will get only 80 units.

In this scheme the risk is borne by the policy holder. That means, if the NAV goes down, we will lose money. But that seldom happens in long term, told by my agent.  

Why did I join this ULIP? Answer is simple. To invest money. I know this is the same reason most Indians purchase insurance policies. Your agent will never tell you the difference between insurance and investment. And of course, it was long before I turned money conscious.

The advantage of ULIP is that it is both insurance and investment at same time. However, financial experts say that ULIP will serve neither as insurance nor  investment. Let's examine one by one.


When I joined this ULIP, the sum assured was two month's my salary. After four years now, the sum assured is less than my salary. That means in the unfortunate event of my death, my family will receive less than month's salary as insurance.  The purpose of life insurance is that in the event of the death of the insured, his family should be able to continue their lives in the same life style. Is it possible with this coverage? No.

The recommended insurance coverage of a person is 10 to 12 times of his/her annual income. Again this depends on many factors, like your life style, number of dependents, etc. If you have no dependents, or your dependents can support themselves, you don't need an insurance coverage. To get 10 times of my annual salary as sum assured, I will have to pay nearly 25% of my salary as monthly premium. This means as an insurance plan, ULIP is very expensive.

This explains my insurance seldom covers my needs.


Let's come to the second part, Investment. For years, I was happily paying the premiums without analyzing the performance of the scheme. Anyway, my agent told me that the returns will be good only in long term. Long term means Five to Ten years. Initially the allocation charges are high, so it will take more years to make up these allocation charges. (some one may ask, why should you pay these allocation charges in the first place, and wait for all these years to make it up. I have no answer). Once I started to learn about financial management, I started to monitor the performance of this ULIP.

LIC website does not show you the historical NAV of any of their ULIP schemes. Well, they designed their website for traditional insurance policies, and it will take time to update it. The websites like allow you to view the historical NAVs. Once I checked the NAV, I shocked to find that the value of the NAV is in the same range as what was it four years ago. In the history I can see the NAV is gone 20% up during year 2010, but then it came back.

During this four years, the prices of virtually every thing went up by at least 50%. Even my salary is doubled. Then why this NAV is not increased even by 1%? With all the allocation charges, I am at losing end. I wish I had gone with bank recurring deposit instead of this complicated ULIP. But honestly I was not aware of the bank recurring deposits at that time and how simple it was to start one.

But, it was not over. As I started periodically monitoring my ULIP account, I found that a few of the units are missing every month. Like today I have 1000 units, and if I check after one month, it is only 998. With my experience with Mutual Funds, I knew that once I purchase a few units, no one can take it away from me without my knowledge. Then where have these missing units gone?

I wrote to them through the LIC online website. Within 30 minutes I received a call from the local branch. They are very fast. The lady over phone explained to me that the units are utilized for my insurance coverage. That means they reduce 2 or 3 units each month, which will be utilized to cover my insurance coverage. Again, I am on the losing end.

So it did not serve as an investment either.


Neither of the above facts are my invention. I can find these information all in many articles and blogs. The important point here is I had to learn all these through the hard way.

Now, what is the alternative to this? Ideally what should I have done four years ago, instead of joining a ULIP?

You need to treat insurance and investment separate things. For insurance, the term insurance policies are the most economical ones. A term insurance policy is a type of policy, in which you pay premium for insurance coverage for a certain period. Once the period is over, you are not paid anything. No bonus, no sum assured, no survival benefit, whatever you call it.

For investment? Well, thousands of methods are there. Bank recurring deposits, Public Provident Funds, Mutual Fund SIPs, etc. All these are designed purely for investment purpose. You need to do some research before finding the one most suits you. Don't tell me you have no time for research, you are working at least 6 to 8 hours a day to earn money, so it will definitely worth  spending some time to plan your investment.

Happy investment

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