Experience maketh the man that he is. As many unsuspecting investors I was conned into buying large number of ULIPs and Endowment policies since the day I started earning. After spending years of’investing’ my money, I have realized my mistake and wanted to share my experience with ALL. I was parted of my money in multiple ways both by Public and Private sector insurance companies and their Agents in different manner. Be it the Manager of the branch driving down to my home with a cute salesgirl or the hyperbole agent promising me returns that rival KUBERA’s, I was lured into traps hitherto unknown to me. I am ready for a constructive fact-filled debate on this topic from any Insurance/Investment agent within my time constraints. My only aim for writing about this topic is that gullible investors should not fall prey to the greedy sharks who unleash ULIPS on us.
The Basics first - What is ULIP - Unit Linked Insurance Plan. Your fund is invested in markets whilst you get Insurance cover, Tax cover, and supposedly better returns. Wonderful idea isnt it at first sight. You knock 4-5 fruits with a single stone! Well now let us see who gets to eat those fruits now! Please allow me to dismantle the aura of ULIPS
High Premium costs - Do you really need to pay such high amounts? For example a 1lakh SBI Smart ULIP gives me 5 LAKH insurance cover. Suppose I die my family gets 5 lakhs and/or my invested amount(~10Lakh in avg case). Now paying as little as Rs15, 000 per year will give me a term insurance for 50 Lakhs! I can use the extra money to invest in something better. With a single premium of my SBI Smart ULIP I could have even paid for my entire Term Premium.
Upfront charges - The upfront charges are anywhere from 10% going upto 20% especially for the initial years. The Insurance companies share 30-40% of it with Agents. For this single reason every Ram, Rahim and Samuel Insurance agent will try to sell a ULIP on the poor investor instead of other Insurance products that fetch very low margins like Term insurance. For example I took a ICICI Premierlife Pension for Rs 3Lakhs upfront premium and found that they have taken a cool 46K out of my 300K. I have barely managed to have my capital intact after 3 years of this policy. Any day a Mutual Fund or even an FD would have given me better returns. One silver lining here was that I learnt the option of switch and tried to implement it vigorously by following market trends to get my capital back. However this is time consuming and risky trying to time markets.
Underperforming Funds - ALL the ULIP funds are underperforming when compared to Mutual funds. I have compared multiple funds from ICICI, SBI, LIC etc. I am yet to find a ULIP fund that has outperformed Mutual funds. The fund managers are paid to be conservative and sleep on your money instead of better and aggressive returns like in a mutual fund.
Misc Charges - There are Fund maintenance charges, Mortality charges and a whole load of other charges lots of which are deducted monthly by cancellation of units! This way the Insurance Company makes sure that they eat into your margins to keep their fat fund managers happy.
Surrender Charges - Hitting below the belt.Surrender charges in ULIPs are anywhere from 40% to as high as 100% of the fund value which are applicable from the day of Policy and stay for as long as 5 years. What this essential means that in case you realize your mistake and want to get back your money, the Insurance Company will deduct a hefty percentage as surrender charges. I consider Surrender charges asthe biggest fraud of Insurance companies since the fund value you are having is already bone-dry due to high allocation charges and on top of that, the insurance comparable want to eat the rest of money in the name of surrender charges. This reminds me of the Monkey share story from my childhood days. Sad but true that the Insurance companies and their evil agents have no shame or remorse for perpetrating all this on us. So the upshot is that due to all the above charges plus Surrender charges which virtually eats into your remaining money if you surrender the policy within 5 years, your capital could get wiped out by 30% or more!. On the contrary even Tax saving mutual funds like CANARA ROBECCO Mutual fund has given be 20% in late 2009 to 2010 period(when the bull run was already over)
No flexibility or options - There is clear lack of accountability or flexibility when compared to say a Mutual fund. For example the SBI Smart ULIP that provides highest NAV in 7 years, there is no option to switch or monitor your funds. All decisions are taken by the dumb fund manager and you have to literally watch your money go down the drain. I have a SBI Smart ULIP plan and I am yet to recover my capital after 1.5 years when even a conservative Tax Saver mutual fund like Canara Robecco Tax Saver fund better returns.
Update:
Some of the viewers felt that ULIPs are a marathon race and you should give them a minimum of 10 years to perform. I will counter that forget 10 years even if you give ULIPS a 100 years you will still not get your money back or whatever you get will get will be far far lower money that what your good old PPF, FD gave and a ridiculously low money compared to a Good Mutual fund/Direct investments in Good Stocks.
An illustration based on my Portfolio:
Lets performance of the Stock market in a 4 year period from 2010 to 2013, the indexes are at lifetime highs, a SIP in an average mutual fund also shows positive balance(Research on Moneycontrol or ValueresearchOnline etc.). If you were more aggressive and invested in Good stocks the returns would have been even higher. Now after 4 years an ICICI ULIP that I was mis-sold shows me 4% return and the Aviva shows me a 10% LOSS on a 3 lakh portfolio. This is the scenario when the Stocks at are lifetime highs. During the lows of 16K my Aviva portfolio was down 30% .Now Aviva gives me a 6 lakh Sum Insured. Now if I had invested the 3 lakhs in an FD at a nominal 7% interest excluding taxes, I will still get 21K in interest income every year. If I spend 9K, I can get a 25Lakh Pure term insurance. I will still have 12K interest money per year which will be 48K more money at end of 4th year along with a 5X times better Insurance cover. Now I have just invested in the most conservative investment. A good look at the Top Mutual funds or other Good stock shows that I could have got even better returns. There are mutual funds that give you payout at regular intervals which you can re-invest. So even if the Stock market tanks tomorrow, these mutual funds have given you the payout during the profit cycle which you can splurge or better invest in a Debt instrument. Why instead of stocks/mutual funds even if you have invested in a compounding Debt instrument in 10-12 years, the amount would have increased by more than 3x times which is just outright impossible for a ULIP to match.
All these policies are surrendered by me in 2013 when the Market was nearing the peaks!
I surrendered my SBI Dumb ULIP Plan. Lost 24% of my money after investing in the middle of 2009 when the stock market was still in 12K levels!(The Buggers did not give me back my money until after 4 years lock-in period even though I sent them the request in 2010)
I surrendered my ICICI Smart Kid(Dumb adult?) Policy with a 18% loss of money.This after investing in beginning of 2009 when the Market were at ridiculous lows of 9000 level!
I surrendered my ICICI Pinnacle Saver Retirement policy with a 15% loss of money after 5 years.This after investing in middle of 2008 when the market was at 14K levels.
I am planning to Surrender my Aviva policy shortly which is showing me 10% loss inspite of staying invested for 4 years and running. There are still 2 more crap that I need to get rid off, but those are lower investments comparatively.
I plan to keep going on my Pure term plan that was taken in 2008. I currently invest in a mixture of Mutual funds(20%), Debt Instruments(20%) and Stocks(60%). I plan to reduce my stock exposure as I grow older by moving them to Debt instruments.