Decoding complex insurance product ULIP

In this article I am intending to decode the complexity part where it is lying with a ULIP product. As both of aware that the ULIP product is complex one but it is a good product if you select one properly considering all required factors by your own research. Due to the unawareness about the product and because of mis-selling by agents, lots of people cheated by losing there money. As I said in my previous articles, profit minded and crooked agents are the curse in this area.

To refresh your mind, ULIP policy selection required your total attention to two parts. Costs and performance. If a ULIP suitable to select based on its performance and costs, your responsibility is not at all end. The mistake happening from people is, most of them interested to compare this product with traditional insurance policies, which providing guarantee to your money. This is a big mistake. Whatever the ULIP is better in the base of cost and performance, an investor in this policy required to continuously monitor the policy to leverage maximum profit from it.

Here are some information which will be useful to those interested to buy ULIP policies. The complexity of this product is in some areas and that should come under your self scrutiny.

1. Most of the time an agent purposely hide the best product from customers. It is happening because the commission from the product may be very less or he doesn’t have any other profit by selling the same. It is a customer’s duty to identify such product and invest on this and monitoring for better profits.

2. Mis-selling – Remember ULIP is not a product to invest if you are near by or in after your pension. This product required time more than 12 to 15 years to get good returns. Agents can say anything to sell and get commission from the policy. Some of the cheating words are as follows:

a. Your money will double within 5 years or less.
b. You don’t want to pay anything after paying premium for next 3 years
c. You have guarantee on your money by investing on this policy.
d. Our company is very reputed with good brand mark and we have lots of customers
e. You will get special discounts for applying this policy before a particular date.
f. Company giving special gifts to customers who are applying to this

I am planning to post another article soon about the selfish and crooked agents in these areas and will cover more about there treacherous behavior to cheat customer and earn commission.

3. The main complexity of this product is, it is not providing any guarantee to your money. If a product saying that providing any guarantee, then your money will invest in the debt fund instead of required equity fund. ULIP is not at all recommended to a customer with investment focus in debt funds. He can better go for mutual funds. Growth of your fund and profit is entirely connected to stock market.

4. You should be well aware about the main charges applicable to the policy. These are, Premium Allocation Charges, Fund Management Costs and Policy Administration Charges. In most case, these charges will follow till the end of the policy term. A best method to identify the possible costless policy, collect same category ULIP information from multiple insurance companies and compare all the above costs for your intended term. Brochure of each ULIP should provide all these informations.

5. As agents says, you have provision to stop paying premium after paying the 3rd year. Paying premium continuously for 3 years is a must in this product. There is a trap here. First, an agent saying this because his commission from selling that product will last for next three years. After third year, if you pay premium or not, he will not get any benefit. Then why should he compel you to pay premium? Second is, suppose you have a regular ULIP with 10 year term. As per your agent, you stopped paying premium after third year. Find. Then who will pay the charges to company for rest term years? i.e. for next 7 years? Naturally it will deduct from your previously paid premium amount. In this case, in the end of your term, if you are going to collect money from this product, go with a cheque and draft. Friend, nothing will be there in your account because of this deductions and may be you have to pay back to the company. Good joke.

6. You could be well aware about the funds associated with this product and also well aware about the funds where your money is investing. Switching is an option with all ULIP policy but nobody knew the importance of switching. This is one of the best feature ULIP providing over a mutual fund. Through switching, you can switch your money from one fund to another fund depends on market situations. It is not recommended to keep your money in equity fund when the stock market is high. That time your money might have grown clearly and you should switch the same immediately to any secure debt funds associated with the ULIP. Or stock market will come down by next days and value of your fund units will also come less and your profit will go.

Like this, it is not recommended to keep your money in debt fund when the market is facing total bear phase. You should immediately switch the money total to equity funds to leverage maxim profit from the next bull phase.

These two parts 98% of the ULIP investors are not aware and I am guarantee..

7. You should be asked and well aware about the fund performance against its bench mark. If a ULIP and its fund performance beating the benchmark for last 4 to 5 years and present year too, you can certainly consider this ULIP if the costs also less. But always remember, past or preset performance of a fund is not the guarantee for future performance. To avoid any kind of pain in the future from underperform the fund continuously, you should monitor and identify the weak part time to time and switch your money to more profitable funds or debts fund to at least to not lose your entire amount till completing the term.

8. Once you decided to invest in ULIP, don’t stop paying premium after 3 years. Continue the same all over the term if possible. There are some ULIP products have feature that not charge premium allocation and policy administration charges after certain period of 6 or 7 years. If your policy providing that feature, then invest continuously till that year then stop if you don’t want. This will enable you to not any money in the name of PAC or administration charges for forthcoming years.

9. Aware the insurance you are receiving with ULIP. There are some amount of automatic insurance cover applicable with each policy. Most of the time it would be 5 times of your yearly premium. ULIP is not a product for maximum insurance cover. Insurance cover with ULIP product is not an important factor but it is only a feature an investor can chose or not. If you select more cover with ULIP, your mortality charges will be high and the amount investing to the fund will be less. So be conscious in this part. Select minimum insurance cover with ULIP to give maximum amount to the fund. Instead of selecting high coverage with ULIP, you can prefer a cheap term plan with very huge life cover.

10. Unlike traditional policies, you could be vigilant on your ULIP policies or it will cost you. If you have required amount of knowledge on this product, you will get handsome profit at the end of the term. If you have extra ordinary knowledge in this product, you don’t want to invest any were other than this product. Always learn all the future about the product, not only in the case of ULIP, before selecting to invest. Always keep all the documents properly. Ask to the insurance companies if they missed out any important information that should be attached with your policy documents.

I am stopping this article with a small story. This author and one of my friend applied for a ULIP policy about three years back. Last week we together approached the insurance company to know our fund value. My friend surprised because the total fund value was 24% less from the total amount he paid. Author was very happy because my fund value is nearby double of the total premium amount I paid for three years. I was doing proper switching and monitoring. This ULIP is a laggard and an underperformer against its bench mark. Even though I doubled my fund value with proper management and monitoring. If I had a ULIP with better fund performance, do you thing the money will be only double? No it will be triple or four times higher within simple three years.

The one, my friend, didn’t do anything for last three year so cost and market fluctuations eat a great part of his money.

Each product has black side and white side. Identifying and avoiding black or dark side of the product is upon the capability of an investor. Identifying and utilizing the white side of the product is the success of the investor. So be a wise investor with proper decision and management capacity.

You can also inform me once if you feel anything I missed in this article. Feedback always welcome with constructive criticisms. That would certainly leverage my productivity and standard of forthcoming article or to do necessary changes in previous articles to get maximum benefit and knowledge to my readers.

Feedback can send to investinternals@gmail.com or you can also comment on this page itself.

Thank you for reading…..