First thing first, decide what you want – return on investment or insurance? You simply can’t have best of both in one plan. Well, endowment or traditional plans offer something similar where it looks like you are getting a lot of things but in reality, the benefits are abysmally moderate.
Low-cost ULIPs on the other hand emphasise on maximising return on investment and saves you from the confusion of insurance though it still gives a basic cover. However, the objective and approach of ULIP is single minded – return on investment.
Experts have always emphasised that one should never mix investment and insurance goals. Keep them separate to get maximum benefit from each. Buy one plan of pure investment (ULIP) and one plan of pure insurance (Term) and your life is sorted. Why create confusion?
With this logic, let’s begin to list why ULIP and especially the new low-cost version is a better option than traditional or endowment plans for small and medium investors.
Cost or Charges Associated
Simply put, this is the cost that is deducted from the premium you pay before being invested into a fund. There are essentially four charges: Administration Charge, Fund Allocation Charge, Fund Management Charge and finally the Mortality charge which goes into the insurance component of the plan. The higher the sum of these charges, the more money gets deducted from your corpus and you are left with lesser amount in your pocket. Unlike ULIP plans, endowment plans also, aptly known as traditional plans, also do business in a traditional manner and thus their administrative cost is higher and lower returns. No guesses for who suffers the brunt of it – yes, the buyer.
Low-cost ULIPs are more attractive because their costs are usually in the range of 1.5- 2.5 per cent and this translates into more money in the investors’ pocket.
Why should an investor pay more money for managing the funds? The deduction at the end pinches a lot. If you don’t wish to waste your money under financial jargons of irrelevant costs then low-cost ULIP is best for you.
The issues with endowment plans regarding lack of transparency are as follows:
No information on what amount of premium is invested where and at what rate of interest.
No capping of commission that an agent can earn. So usual trend is that agents earn around minimum 40 per cent of the first year premium as commission. So, this money goes dead and is not invested. A complete waste of investor’s money.
Very high surrender charges.
No uniform schedule and charges for surrender. This makes the endowment plans ambiguous and unreliable.
ULIP plans offer total transparency and thus are known as customer-friendly plans:
Complete information about investment of your funds from day 1.
Full control over your funds. You can also switch the funds yourself. You can switch funds from debt to equity market and vice versa at least four times a year. However, we strongly recommend using this option only if you are a pro investor and know the pulse of the market otherwise it is best to leave this to the expert fund managers.
Fund management charges remain same for the complete term irrespective of where the money is put up. Typically if the investment is in equity, the charge is 1.5 per cent and of invested in debt, it is close to 1 per cent.
You can surrender ULIP after 5 years.
No surrender amount. In fact, if you do end up cancelling your policy inside of the 5 years, the money is placed in a discontinuance fund which will still give you a return of 4 per cent at the least.
You can top up the amount whenever you want. Say, you get a promotion and higher salary so all you got to do is put that extra money in your existing ULIP as a top-up. Thus, ULIP is an open investment.
The only reason why we invest is to get good returns. Period. No further arguments on this. Well, ULIPs score on this point way better than endowment plan can ever think of. ULIPs is market-linked and provides higher returns along with safety of your money for the balance between debt and equity is maintained. However, the caveat always remain – you need to stay invested in the plan longer, and not being judgemental on the returns in a shorter period of time. Time period less than 5 years is short, in case of a ULIP investment.
Blind followers of endowment plans who vociferously talk about safety as their most cogent purchase reason fail to acknowledge that safety gets 5-6 per cent return while ULIP, a good combination of safety and return, can fetch an investor easily anywhere between 12-16 per cent on investment over a longer period of time.
This clam over safety is a bit too over-rated and decadent in this online era. Investors are quite aware of the market trends and with the flexibility to switch and complete transparency there is absolutely no meat in the logic of ULIP being unsafe just because it is market linked and fetches more returns.
ULIP plans are way more flexible than endowment policies. You can partially withdraw money from ULIPs after a certain period (usually 5 years). This often comes in handy if there is an urgent need of money.
Protect yourself from any trap and mis-selling primarily driven by insurance agents who wish to earn higher commission by selling an endowment plan. Low cost ULIPs are readily available online. It is best to compare the prices and buy them online. Online ULIP plans are cheaper, safe, transparent and most importantly provide better returns.
Why waste money? Think hard and ask relevant question when you go to buy an endowment plan next time. You will see the difference yourself. Information is the key. Make an informed buying decision.
The author is Head, Life Insurance, PolicyBazaar.com