Tuesday, December 5, 2006

ULIPs : is there a better way?

Unit linked insurance plans (ULIP) is a bestseller today. Life Insurance companies are falling over each other to introduce and market their ULIPs. Backed by aggressive selling by agents and the booming stock market, the sales figures they have notched up is mind blowing.

Traditionally, life insurance products have usually been considered as ‘safe’ investment options, which also offer a life cover. However, since unit linked insurance plans (ULIPs) burst onto the scene a few years ago, the rules and definitions of life insurance have undergone a sea change. The popularity of ULIPs can also be attributed partly to the scrapping of ‘assured return’ insurance schemes and falling interest rates which rendered conventional products like endowment plans unattractive.

And instead of taking insurance based on their economic value( human life value-HLV), people are going for ULIPs which is Mutual Funds plus term assurance rolled into one. To my mind, one should look at the following issues before writing the cheque to your persistent agent.

Transparency: The quality of data and its presentation need to improve significantly, if investors, both existing and potential, are to be able to study portfolios and make intelligent decisions. ULIP portfolios need to be disclosed regularly. Mutual funds are required to disclose all relevant information like portfolio, assets under management (AUM) and the benchmark indices to name a few.

Expense: The annual expenses incurred on the ULIP are 3.50% (2.00% recurring and 1.50% fund management charges) apart from insurance charges, In contrast, mutual funds are managed at an annual expense of 2.50% (maximum) of net assets.

Past performance: While the Mutual funds have a history of past performance, the ULIPs have a short history and the current bull run to boot. Performance of a fund manager will be tested when the going gets tough. ULIPs have not been tested apart from the May crash.

Isn't it more worthwhile to go for term assurance from an Insurance company and a trusted and performing equity fund from a Mutual Fund/AMC?
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