At the start ULIPs were among the most sought after financial products. But, soon it slipped away from the focus of investors until it became essential to launch an array of reformatory measures. In its new avatar, the ULIPs have once again become a low cost option for investors. So much so, some ULIPs of recent origin are cheaper compared to direct plans offered by mutual funds.
Distributors taking investors for a ride
In the past rampant misselling indulged in by distributors and the high charges that insurance companies levied dealt a body blow to ULIPs. Some ULIPs even charged as much as 80% of the premium paid in the first year towards charges. Distributors never revealed the high charges to gullible investors and projected just the returns that the market linked product offered.
IRDA clamps down
The IRDA had to finally clamp down with the charges getting capped at 2.25% per annum during the initial 10 years that the ULIPs were held. IRDA fixed this rate based on charges for similar products offered by competition like mutual funds. Now the distributors started feeling the heat and sale of ULIPs plunged from 2010.
Insurance companies wake up
Insurance companies have woken up and added more sugar to the deal by bringing down the charges further. For instance, for an investment plan of Rs.2 lakhs and above there is no charge for premium allocation on Future Gain offered by Bajaj Allianz. Edelweiss also followed suit by knocking of administration charges. Some others found other means of soothing the nerves of investors without tinkering with the charges per-se.
But, the game changer has been Click2Invest plan offered by HDFC life. A 1.35% fund management fee is all that it charges on the corpus. A mortality charge exists but that covers the life of the policyholder. This plan has therefore in effect become cheaper even compared to direct plans offered by some of the direct plans from diversified equity funds.
Makes sense to revisit ULIPs now
The reduced charges may not offer a big solace to the bruised investors or egg them back to the ULIPs. But, when they apply the reduction across the term of the policy, they can see reason why the IRDA intervention actually saves them significant amount of money over the life of the policy.
Key drivers to play it safe
The anti-virus applied by IRDA has worked for ULIPs and a semblance of respectability has been re-established. Investors can now consider ULIPs, but with the following riders.
The first investment into life insurance should never be ULIP and ideally, it should be the last in your insurance portfolio. As a first time investor in money market instruments, you are better off with mutual funds. With ULIP, you should have adequate understanding of how lock-in periods impact your financial planning and staying invested is the only way you can maximize your returns. Similarly ULIP is not reckoned as a best tax saver though it may have certain advantages as a retirement planning product. Finally, buy directly from the insurance companies, most of whom have online facilities to make it easy for you.
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