Angelo Mathew works as an assistant editor in a media company. He has a hectic schedule and spends long hours in office.
A complete techie, this 23-year-old has a passion for cars and knows about every brand in town. But the same passion (or interest) does not mirror when it comes to his investments.
Simply because his dad insisted (on the agent's recommendation), he bought a life insurance policy-- a unit linked insurance plan (ULIP). It would save him tax, the agent had said!
Now, the only thing that Angelo understood about the ULIP was that he would make Rs 6 lakh in six years! Thanks to his insurance agent, Angelo wrongly believed that a ULIP is a tool to make fast cash.
What's the premium outgo?
He pays an annual premium of Rs 30,000 every year and has paid three premiums so far. Today, he is left with less than Rs 60,000. Thanks to two things which the agent never told him:
First things first, let's get the concept of ULIP clear. It is a combination of plain life cover with a component of investment thrown into it. Out of your total premium, some part is set aside for the insurance cover and the rest is invested. You can choose to invest in an equity fund or a debt fund. Depending on your risk appetite; you can take a call.
If you choose equity, the money will be used to invest in the stock market whereas in a debt fund, the money will be used to invest in government securities or bonds. Angelo chose a balanced fund that invested in a mix of both debt and equity. He paid Rs 90,000 as premium so far, but the balance in his fund is just Rs 60,000! And now, he is contemplating on withdrawing this money before it dips any further.
The low balance in his funds could be attributed to the high charges, which Angelo had to bear.
ULIP would be incomplete without the mention of charges, which forms a major part of this product. The charges are usually high in the first three years, which could be anywhere between 20 to 100 per cent in the first year! Every year the charge comes down but dramatically from the fourth year onwards.
Let's say you pay a premium of Rs 10,000 and the charge on your policy in the first year is 40 percent. So, Rs 4000 will be deducted from your policy towards the charges and the remaining Rs 6000 will go towards your fund and your life cover.
Volatile stock markets:
Angelo did not know the risks involved in buying a ULIP that invests partly in equity. He invested in the fund advised by his agent and expected to make a quick buck. This is what most investors do. It is important to know that when investing in equity, there is no guarantee that your money will grow immediately. Equity investments are meant for long-term, atleast 7 to 8 years. Only if you have a long-term time horizon, should you consider investing in it.
Angelo bought a ULIP to avail tax benefits, but has landed up with a product he doesn't like. So, what should he do now? "He should stay invested ideally for the whole policy tenure or should consider paying a lesser premium after a few years." says, PV Subramanyam, financial domain trainer. ULIP offers the feature to withdraw your fund units after three years, but having this feature doesn’t mean that you have to necessarily apply it explains Subramanyam. And it does not make sense too, since he is yet to recover his capital investment.
Alternatively, Angelo could consider a top-up option and also look at monthly premium payment option at the same time. This would help him to average his cost of units.
|Top-up premiums are the amounts that a policyholder can invest in the ULIP over and above the regular premium. The charges applicable to top-up premiums are far less than regular premiums - around 1 per cent of the premium amount.|
So, should you buy ULIP at all?
Financial planner, Arvind Rao, says, "An ideal scenario would be to have a combination of a term plan and a mutual fund. It is best to keep insurance and investment needs separate than opting for a two-in-one plan such as ULIP."
Since Angelo has already invested in it, he should not be tempted to close the policy or think of earning returns anytime soon says Subramanyam. He advises the same to other investors.
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