Tech Jungle


Buying ULIP’s? First Read this…
June 7, 2007, 3:00 pm
Filed under: FINANCE

Unit Linked Insurance Plans are good options for those who look out for the returns with the insurance. ULIPs offer fairly good returns over a period of time as all investments give returns if the holding period is long.

For a layman, the source of knowledge of these Insurance plans can be advertisements, personal contacts. But generally the plans are purchased from company through the insurance agents/advisors. These agents/advisors use various tricks to sell the plans to the customer who generally is taken by the sweet schemes offered by the insurance companies.

Let’s first understand what are ULIP’s and how they work. Unit linked insurance plans ULIP’s are combination of insurance policy and investment portfolio. As in case of a normal policy in ULIP’s as well a stipulated sum is required to be paid on specified intervals varying from monthly, quaterly, half yearly and yearly. Now contrary to normal insurance plans where the whole amount is meant for the insurance purpose only, here the portion of premium amount is kept aside for the insurance purpose and rest is invested in market under the guidance of portfolio mangers. The corpus is invested in market and units are allotted to the customer as in case of the mutual fund. Regular NAV is published on the basis of which the value of the units is decided and return is calculated or it can be said that this is the value which is paid in case of any unfortunate happening or maturity of the policy. The catch here is the charges of managing the fund is to be borne by customer on continuing basis which are too high than normal investments one can make in normal market. These charges are nothing but the income of the insurance company from which a big sum is paid to agent as commission.

The charges includes mortality charge for the insurance, policy administration Charge and fund management charge for managing the fund. The ULIP’s gives option to customer to remain invested in Equity market, Debt market, Guilt Edged securities and varied combinations of these. Also, here switching is allowed for movement of funds to from one portfolio to another. But the free number of switching are limited depending on the insurance company after that again a charge is levied on the amount of fund switched.

Agent’s usually say that the customer do not need to pay any premium after three years in ULIP’s and the policy will still be alive for the remaining tenure opted by the customers. Advisors sometimes even say that the premiums already paid by customer will itself start generating the returns from which the premiums of the next years will be paid. One should not fall prey to these tricks instead should ask for the written premium payment schedules which shows the premium amount to be each year and how that amount is going to be amortised over the insurance policy and investment in the market.

All Ulips generally come with an option known as a ‘cover continuance’ option. This option has to be opted at the time of starting the policy. The option ensures the continuation of the policy in case due to some reason the individual is unable to continue paying premiums after paying premiums for the first three years.

It is an option built into the policy to cater those who face a financial deficit few years into the insurance policy and are not able to keep paying the premium in the years to come.

Insurance advisors, always make best use of this opportunity, use this continuance option as selling point, They sell the ULIP’s by saying that customer need not require to pay any premiums after three years. Resulting to which the customer who is capable of paying the premiums after three years also stops paying.

Now this is not really in their best interests. Now after the new guidelines issued by Insurance Regulatory Authority of India reviving a ULIP will become very costly.

The main reason why agents misguide customers is the amount of commission being paid to them which is higher in first three years and less thereafter. Agents eye a sale of new policy to customer in the fourth year.

In the first year of the policy upto 70% is deducted from the premium paid by the customer as various charges and a huge sum is paid to agents.

Other than this, if individuals stop paying premiums after three years also increases the risk of the policy being terminated. The individual may have stopped paying the premium but that does not stop the insurance company from deducting other charges like the mortality charge, fund management charge, policy administration charge, etc. These charges are usually recovered by cancelling units that the individual has accumulated over a period of time.

A policy on which premium is no longer being paid can continue till the value of the investment is greater than one year’s premium. If it falls below the one year’s premium then the policy is ended and the amount returned to the individual.

The other reason is that most individuals do not like policies in which they are locked in for long periods of time. Hence, the easier way to sell them a Ulip is by telling them that they need to pay a premium only for three years.

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