Home > Deliberations, Personal Finance > Is ULIP a Good Investment Route? (Part 3 of a 3 part series)

Is ULIP a Good Investment Route? (Part 3 of a 3 part series)

In the first and second posts, I have tried to deliberate on the pros and cons of ULIP and ELSS products. We have seen that ELSS as an investment option is far superior to a ULIP. If an investor wants life insurance also as a part of package, it would be much better to invest in an ELSS and a term insurance plan, rather than a ULIP option. After all these deliberations, I am left wondering why the entire world seems to be gung ho about ULIP.

The reason for this lies in the commission structure offered by the organizations. Broker commissions usually fall in two buckets: First year commission and Commission year 2 onwards. A mutual fund AMC typically pays an agent a first year commission of 2.25% of the investment amount. The follow on commission is usually in the range of 0.5%. That is, is an agent canvases an investment of 1 lac from you, he only gets a paltry Rs. 2,250 in the first year and Rs. 500 in the subsequent years.

Compared to that the life insurance agent goes home with a jackpot! Insurance companies pay upto 40% of the first year premium as agent commissions. This comes down to a respectable 5% in the subsequent years. Note that the exact commissions depend on the specific scheme.

With the above in mind, we can clearly find explanations to the below:
1. Why ULIPs charge an obscene amount of charges when compared to an ELSS?
2. Why you have millions of calls from insurance agents, but rarely from a MF agent?
3. How your next door agent bought the swanky new sedan!!

Now the big question: Is this fair on the insurance companies to take the investors for a ride? Why not?!? None of the insurance companies are hiding their charges. They prominently display it in their brochures and are very open about it. If a customer does not do his homework properly before investing his hard earned money, so be it!

The conclusion: Before investing your hard earned money, remember to do the following (in their order of importance):
I: Ignore what everybody says! Avoid the herd mentality. The herd does NOT necessarily signify the best option. They only list the most popular one.
II: List out investment products which are comparable in terms of returns, risk and investment horizon.
III: Do a thorough comparison between them and access the best option.
IV: Read the fine print before going for the kill.

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  1. March 20, 2009 at 6:07 pm

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