Friday, January 06, 2006

ULIP Is A Killer

This is in investor's interest.

They say, if destiny doesn't kill, ULIPs can. Then your dependents can claim the insurance, but that doesn't mean one has made a good deal as Ashish has learnt the hard way.

ULIP is Unit Linked Insuarnce Plan, as most of us know. They give us insurance, while the money stays invested as a mutual fund. The broker will promise you that whenever you want your money back, you can withdraw the amount, and you will always get an increased amount.

That is where the trap lies.

As Ashish said, it is neither here nor there. First of all, the moment you withdraw your money, your insurance cover is lost, and which was exactly your basic purpose.

Secondly, this ULIP mutual fund is too mutual to the comfort, meaning hereby, it increases hardly at the rate of a fixed deposit, with no guarantee of increasing at all. So you are neither insured, nor you have invested.

And the lastly it is VERY costly. The best option is go for a term insurance instead which is dirt cheap, and invest rest of money directly in Mutual Funds.

Still not convinced ? I will give you an example of my another friend who got fooled by this "insurance-cum-investment".

He gave Rs 48,000 to Bazaz Allianze, for a twenty year old inusrance term. In return, he would get an insurance of 19.20 Lakhs, and also that money will be invested in an ULIP Mutual Fund,which he can withdraw anytime after three years.

Had he gone for a term insurance plan, it would have cost him Rs 8500 per annum for 20 years ie Rs 1,02,000 at the end of twenty years.

And had he invested that Rs 48,000 in an established mutual fund say HDFC Tax Saver(Growth), which has given 42% percent compound interest for last 10 years, and we assume it keeps on going the same way, the scenario at the end of twenty years would be like this.

In orginal scenario with No Eventuality -
Cost: Rs 48,000.
Return(at the rate of 6%): Rs 1,53,943.

In orginal scenario with Eventuality -
Cost: Rs 48,000.
Return(at the rate of 6%): Rs 1,53,943 + Rs 19,20,000 = Rs 20,53,943.

In latter scenario with No Eventuality -
Cost: Rs 1,02,000.
Return(at the rate 42%): Rs 5,33,34,487.

In latter scenario with No Eventuality -
Cost: (Less than equal to) Rs 1,02,000.
Return(at the rate 42%): Rs 5,33,34,487 + Rs 20,00,000 = Rs 5,53,34487.

Now you can make out easily because figures are before you. Of course, mutual funds are governed by market there is no guarentee for returns, but then it is true for a ULIP mutual fund as well.