ULIP is not ideal for financial planning

K. ARAVIND

Recently, the headline of an article on the business page of a leading Malayalam newspaper was: ‘ULIP is more important in financial planning’. This note, written by a top official of a leading life insurance company, says something misleading.

The note reads: “One of the key features of ULIPs is that it provides insurance and protection as well as investment opportunities in the market.” The fact is that the benefits of saving time and money through a single plan can be misleading.

The unscientific combination of investment and insurance in ULIPs does not serve these two purposes properly. When choosing insurance products such as ULIP, the basic goal of financial planning, which is the required insurance, goes unfulfilled. Insurance is not really for investment. Life insurance is intended to ensure that the financial status of the family is maintained for a long period of time in the event of an untimely death of the family’s source of income.

A person’s life should be insured for a sum of at least 10-15 times the annual income of the person. This goal is fully achieved through term policies aimed at higher insurance coverage. Term policies with the sole purpose of life insurance are available at a relatively low premium compared to the sum insured.

Mutual funds are better for investment than ULIPs. The charge for insurance products is higher than for mutual funds. SEBI (Securities and Exchange Board of India), the regulatory authority for mutual funds, has sharply reduced the charges for mutual funds.

Although the rates charged by ULIPs on various items are lower than in the past, they are still expensive investment products compared to mutual funds. Mortality charges levied by ULIPs etc. will reduce the final investment value.

Excluding transaction rates, ULIPs offer returns of three to five per cent lower than mutual funds, even considering NAV – based returns. The difference is huge for someone who has been investing for fifteen to twenty years.

It is best not to confuse insurance with investment. Instead of buying ULIPs, you should opt for mutual funds for investment and take out term policies for insurance. Both of these products can save tax