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DD: The Trouble With Ulips


Devangshu Datta gets it absolutely right:

Ulips have been around for several years. The structures are known. Every financial newspaper and business magazine of repute has analysed Ulips and shown in detail why investors should avoid them.

In themselves, Ulips are not fraudulent; it’s just that investors can get far better deals. So this is a classic case of “buyer beware”. If investors insist on buying Ulips, there isn’t much more that can be done since there are already ample warning signs in the public space. It is also easy to understand why agents push Ulips – due to huge front-loaded commissions.

Ulips offer a combination of insurance and investment, paid for in an annual lump sum. The insurer combines a term cover, deducts the premium. Then it deducts commissions. It invests what’s left in the policy-holder’s choice of debt and equity. One good thing is that Ulip allocations are flexible. The same scheme will allow very large variations in the ratio of debt:equity investments.

The reasons why a separate term cover plus a fund portfolio always outscores a Ulip are simple. Term covers have nominal commissions and so do mutuals. Much more money is therefore, actually invested. Second, there’s no “either/or”. In the event of the death of the holder of a term cover who also holds a fund portfolio, the nominee receives both the policy payout and inherits the portfolio.

None of these Ulip details are concealed as such. It is written there in black and white on the agreements you sign. You can easily do the maths on the term cover (many insurers have calculators on their websites). However, it is not in salesmen’s interest to point it out and they don’t.

The mistake people make is to confuse insurance with investment. Insurance is a bet you want to lose. Investment is a bet you want to win. Two entirely separate intentions. Use two different instruments.

For all my vitriol on Ulips, I believe DD is correct – the instruments are not fraudulent, and they do reveal exactly how they plan to extract your money from you. And even the most cursory search on Ulips will make you feel like this:

imageIf we still continue to buy Ulips, our problem. Devangshu’s articles are always a pleasure to read, and he provides a great unbiased view of Ulips.


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