ULIP: are they a good investment?

Hundreds of ULIP policies are being sold in the market by thousands of agents. ULIP stands for Unit linked Insurance Plans.
People blindly buy these ULIP plans, hardly understanding anything about the ULIPs, their working, their charges & what will be the actual money invested for them.

In this article, let me tell it with an example.

Can ULIP be used as an investment vehicle to create wealth?
That’s a million dollar question, but looking at the cost and commission structure, the answer to the above question is NO.
The biggest drawback of ULIP is that they have very high initial charges. Remember, wealth can be created only when you start big with your investments and opt for compounded returns. Unfortunately in ULIPs, most of your initial invested money is eaten up in the name of commission and charges. All this happens in the initial years, hence you end up loosing on the compounded returns benefits.

Let’s take the example of Kotak Smart Advantage ULIP. Have a look at the commission structure and administrative charges of Kotak Smart Advantage ULIP. In Kotak Smart Advantage ULIP, entire amount of the first year premium would not get allocated at all for investments. This premium (according to the product brochure) would be used to provide you a guarantee of 100 per cent of first year premium if the policy term is 5 years. That means if you invest Rs 1 lakh nothing would actually be invested in equities in the first year.

This simply means that entire amount you give to the ULIP management, goes towards the charges. You can now yourself decide if this makes a good investment. I really don’t know whether there are any good ULIP plans in the market, as I have limited knowledge about the brand of ULIP products. Complex structures for commission and charges make it more difficult to understand.

I have always recommended people to avoid investments which they do not understand and I would recommend individuals to stay away from ULIP plans as well.

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