TSR INVESTMENT SPECIAL-GUEST ARTICLE BY A C.F.

P
Warren Buffett thought that Derivatives are weapons of mass destruction for fina
ncial markets. For an Investors saving ULIPS( UNIT LINKED INSURANCE PLAN) are we
apons of mass destruction.
Ever wondered how much you pay on a complex ULIP plan as compared to a plain van
illa Term insurance plan. Let me explain the same one by one...
The Premium Allocation Charge (the main culprit) is an up-front charge recovered
as a percentage of the Life Insurance Premium and varies as per the year in whi
ch the payment is made.
The same is between 20 % to as much as 100% of the premium amount in the first p
olicy year in most of the Ulip Plans. This goes towards commission to agentâ s pock
et, underwriting and other activities involved with the issuance of the policy.
Further, the Premium allocation charge would be 0 to 10% of the premium in the s
econd and third policy years and 0 to 5.0 % from the fourth policy year onwards.
Most ULIPs tell you that you will make money if you are loyal to them - i.e. whe
n you stay with them for a long time. I wonder why, if they ask you to be loyal,
that they ask you for all the commissions upfront? If you get benefits when you
stay for the long term, why shouldn't their benefits (Commissions) also be link
ed to the long term?
Not only is it unfair, it is also ridiculous - because the power of compounding
is not being used. Investment today multiplies at a higher rate than money inves
ted later - so the logic in taking away most of your money today and telling you
that they levy very little future charges is financial stupidity.
Apart from the premium allocation charge the following policy fees and charges w
ill be recovered from the policy fund :
1) Charges towards the cost of insurance (Mortality Charge) is deducted by cance
llation of units from the fund at the prevailing unit price on a monthly basis.
ULIP mortality charges change every year (unlike a term plan) and they rapidly i
ncrease after the age of 50.
2) An investment management fee (Fund Management Charges) not exceeding 1.35% (a
s per IRDA guidelines) of the fund is charged by adjustment of daily unit prices
. Generally this fee is between 0.9% to 1.35% p.a.
3) Then there is Policy administration charges which are deducted by cancellatio
n of units on a monthly basis :It hovers around 40 to 100 p.m. on a minimum prem
ium and increases depending upon the amount of premium. This policy administrati
on charge may be increased by up to a maximum of 5% p.a.
4) Service Tax @ 10.2% on the fund management charges (FMC). This yearâ s Budget (F
Y 10-11) the government has exempting service tax on all other charges, except t
he fund management fee (FMC) same as in mutual funds. At present, service tax is
levied on all charges such as premium allocation charge, fund management charge
s and administrative charges.
5) Some insurance plans are also charging guarantee charges for the guaranteed r
eturns (which is approx. 8%) they are providing which a person can get easily (w
ithout any charge) by investing in PPF, NSC, FD, Debt mutual funds etc.
6) Surrender Charges (0 to 100%) varies from plan to plan and is different for t
ime periods i.e. a person getting out of a plan in the 1 yr itself has to pay 75
% to 100% charges while surrendering on 5 yr or so One has to fork out 0 to 20%
of the then fund value.
For those who have already invested in Ulips without proper understanding (After
reading this) should contact their Advisors/insurance company and should get th
e details of exact amount of charges they are paying without their knowledge.
The amount of risk cover nowadays a person gets is miniscule only 5 times the re
gular premium or 1.25 times the single Premium .For a person who can pay Rs. 50
K a year, 2.5 lakhs as sum insured is totally insufficient.
Then as you know the ulip has a lock in period of 3 yrs and if you are claiming
80C deduction then it should be held for 5 yrs. Policy can be surrendered any ti
me during the term. However when the request is received in first three policy y
ears, the surrender value will be frozen as on date of surrender and shall be pa
yable at the end of three policy years (Liquidity Problem). These will be subjec
t to the surrender charges applicable at the time of surrender.
No one can estimate the exact calculations of a Ulip plan because itâ s so complica
ted that only the actuary who made the plan can calculate it. In this respect Li
câ s plans are atleast somewhat transparent (helloo) I am not saying to invest in a
Lic ulip all ulipâ s are worthless. And by the way the insurance companies have th
e legal right to charge more in respect of administration charge and fund manage
ment without your approval upto maximum specified by IRDA.
So do you get any reason to invest in a Ulip unless you want your money to be wa
sted and you want the insurance industry and its so called Insurance Advisor (pe
t name â agentâ ) to get rich for fooling you.
In this Tax season (last month of financial year) Agents will give their best pe
rformance in luring away investors Because of high commissions, agents tend to g
o beyond limits and start unethical selling. And the pressure of meeting the sal
es targets force agents to achieve the target by hook or crook.
Remember â ONE SHOULD NOT INVEST MONEY FOR JUST SAVING TAXâ
Most of the people are trapped in idiotic products (Ulips, Endowment plans, Mone
y back Policies) because of their obsession with Tax Saving. These people do not
think that even though they are saving tax for this particular year, they are a
ctually getting into a commitment for next 15-20 yrs. They Invest for a year to
save tax and then next year they have no idea if they would be able to even affo
rd it or not. Tax Saving is just a benefit provided when you Invest your Money,
donâ t make it as a Primary objective to Invest.
Don't buy ULIPs . With entry loads abolished in Mutual Funds, can you imagine an
y reason why ULIPs are useful? NEVER INVEST IN A ULIP instead Buy term insurance
and an equity or debt mutual fund, which is much safer and cheaper.
For persons who have already invested in Ulips and they want to know of any way
out and people who want to know more about Term Insurance WAIT FOR MY NEXT ARTIC
LE.
GUEST ARTICLE BY
Sagar Ghambir,
CERTIFIED FINANCIAL PLANNER.