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Buying Ulips? 4 things to beware of
Personalfn.com | June 22, 2007 10:18 IST
At Personalfn, we have always maintained that buying life insurance should not be treated as a year-end 'tax-saving' event. Insurance has a vital role to play in just about every investor's financial planning. Hence, investors would do well to put in an adequate amount of time and effort while buying insurance.
The same would entail comparing products from various insurers; also, interactions with insurance advisors would be integral to the process.
Given the trend in recent times, there is a fair chance that the advisor would recommend a Unit-Linked Insurance Plan (ULIP). In this article, we present 4 Ulip 'sales pitches' that insurance advisors are most likely to use and investors must beware of.
1. Premium has to be paid only for the first 3 years
Often insurance advisors pitch Ulips claiming that premium payments need to be made only for the first 3 years. The policy will be in force even if premium payments are discontinued thereafter. That's only part of the picture.
The other relevant bit is that, though the policy will continue to be in force, mortality charges will be deducted from the Ulip's corpus in the future as well.
Put simply, the insurance company will continue to make necessary deductions from the policy's total accumulated money. Hence, the accumulated amount will continue to erode with each unpaid premium.
Only the balance amount (net of mortality charges) will continue to be invested in the markets. Furthermore, when the Ulip's corpus is insufficient to service the mortality charges, the policy will cease, thereby depriving the investor of an insurance cover.
2. New Ulips make cheaper buys
Mutual fund distributors have been known to mis-sell new fund offers (NFOs), i.e. new mutual fund schemes by using the Rs 10 net asset value (NAV) pitch. Investors are convinced that buying into an NFO makes a cheaper buy on account of the lower (Rs 10) NAV.
Investors tend to draw parallels between stock investing and mutual fund investing and fall for the bait. In fact, this is one of the most common fallacies in the mutual funds segment.
Now insurance advisors have 'borrowed' the same sales pitch from mutual fund distributors for selling new Ulip offerings. Investors are conned into believing that buying into new Ulips (which are market-linked investments like mutual funds) translates into a cost-effective purchase.
3. Ulip investors are provided with dedicated fund managers
Like mutual funds, Ulip monies are also managed by fund managers. Fund managers are responsible for making investment decisions for the entire Ulip corpus, i.e. for the monies invested by all unit holders in the given Ulip.
However, insurance advisors often claim that Ulip investments will be managed by dedicated fund managers. In other words, Ulips are likened with investments under a Portfolio Management Service (PMS). In the latter, the investor has access to a dedicated fund manager who manages the portfolio in line with the mandate provided by the investor.
4. ULIPS offer guaranteed returns
Ulips are market-linked investment avenues and are susceptible to the same risks that any market-linked investment avenue would. Broadly speaking, a downturn in equity and debt markets would adversely affect the performance of an Ulip.
Of course, the fund manager's skill sets, the Ulip's portfolio structure and the investments will play a part in determining how it eventually fares.
Thanks to the upsurge in equity markets over the last few years, insurance advisors have begun pitching Ulips as products offering guaranteed returns. Nothing could be farther from the truth. Investors should be wary of such fraudulent claims.
By Personalfn.com, a financial planning initiative
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