Khota Paisa

What The Hell is ULIP?

Posted in ULIP by khotapaisa on July 5, 2009

Once upon a time, in a small peaceful town, there were two types of products in market. One was a simple life insurance where the insurer would take 250/- pm as premium from you and promise to give you 10,00,000/- if you died. So you spent 250/- every month to ensure a safe future for your family. Not a costly deal, right? Then there was another product which was for investment. You would give money to an expert to manage. He will charge you a small fee every year and make sure that your money grows. And since you knew that you were not a finance expert, you were happy with this simple arrangement.
One day a bagpiper came to the town. He started selling a product which mesmerized everybody. He said “Instead of giving 250/- every month to insurer and 2500/- to the money manager, give me the full 2750/- every month. I promise to pay 10,00,000/- if you die. I will also make sure that your money grow, though I will not publicly announce where I have invested. In return, you just need to pay some charges“.
An old man who was listening to all this asked “What charges? Can you elaborate?“. The bagpiper was surprised to hear a sane voice. But he continued “Nothing much actually. One you need to pay me for insuring your life. Then every time you invest, I will deduct my charges (30% in the first year, 10% from second to fifth year and 2% there after) from the amount you give me to invest on your behalf. I call it allocation charge but don’t worry, this is for the pain I will have to undergo to invest your money. And then I will charge you mere 30/- every month for the paper work I have to go through. You know how painful these paper works are, don’t you? You may term it administrative charge if you may. And then I will take my share of money every year from the corpus you build. After all I am doing business and I deserve to earn money, right? We call it management charges, by the way. And this is mere 1.5%. You won’t even feel it. Will you? So, what do you people say. Do you still have to buy insurance from the old insurer and invest money through the old money manager?
The old man protested at this but the people were too mesmerized to hear him. Every one lined up to buy this new product which appeared to do everything. And soon, everyone in the town had purchased this product. The bagpiper fondly termed it as ULIP. One day a traveler came to the town and sat down in a tea shop to relax. During the course of discussion, he asked where could he invest his money. He was promptly told to buy ULIP to which he asked what was this ULIP?
Are ye ULIP nahin jaanta?

Having explained ULIP, let me emphasize that ULIP is not bad for every one. Infact people who lack the discipline for periodic investment, can opt for ULIP based product(s).


6 Responses

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  1. Moin said, on July 29, 2009 at 8:09 pm

    Nice one but as you mentioned ULIP is not so bad after all 🙂

  2. […] 1. ULIPs  – Without going into details, let me tell you that ULIPs have been the costliest insurance products of all. Now how does it go with the fact that they are the most sought-after products! If you are interested to know the ULIP story, you can follow the link here. […]

  3. […] 1. ULIPs  – Without going into details, let me tell you that ULIPs have been the costliest insurance products of all. Now how does it go with the fact that they are the most sought-after products! If you are interested to know the ULIP story, you can follow the link here. […]

  4. manoj said, on January 4, 2010 at 8:48 pm

    Dear KP,

    Can you evaluate SBI Life – Smart ULIP (Series II), They claim it to be a win win product.


    Due to the unpredictable nature of the market, you need a plan which not only protects your investment, but also enables you to get market related returns. SBI Life – Smart ULIP(Series II) is the perfect answer to your need, and will give you not only Guarantee on select NAVs during the first seven years, but also gives you the added attraction of participating in the market upside!

    Benefits of SBI Life – Smart ULIP (Series II) :
    Guarantee of the highest of select NAVs in during the first seven years on Maturity.

    Convenience through shorter premium paying term, giving you a choice between 2 premium paying terms (PPT).

    ‘Power of more’ – Guaranteed Maturity NAV, continues beyond the premium payment term.

    Innovative structured investment fund -‘FlexiProtect Fund (Series II)’.

    Hassle free plan – we manage your investment, giving you maximum opportunity for growth while protecting your investments against adverse market conditions.

    Investment cum Insurance plan giving market related returns.

    Attractive Tax benefits under the Income Tax Act, 1961, subject to conditions

    Product Snapshot:
    Age at Entry#*

    Min: 8 years

    Max: 60 years
    Age at Maturity

    Max: 70 years
    Premium Payment Term

    3 years or 5 years
    Premium Mode

    Yearly / Half-yearly / Quarterly / Monthly
    Min Premium (X 100)

    Yearly : Rs. 50,000/-
    Half-yearly : Rs. 25,000/-
    Quarterly : Rs. 15,000/-
    Monthly : Rs, 5,000/-
    Fixed Sum Assured

    5 * AP (Annualized Premium)

    #Life Assured should be aged 18 years and above on Maturity Date.
    * All the references to age are age as on last birthday.

    · Maturity Benefit: On completion of Policy Term, Fund Value will be paid.
    Fund value will be calculated based on NAV which is higher of:
    o NAV as on date of Maturity
    o The Guaranteed Maturity NAV

    · Death Benefit: Higher of the Fund Value or Sum Assured (net of partial withdrawals) is payable.


    • khotapaisa said, on January 5, 2010 at 12:18 pm

      Hi Manoj,
      Before I comment on this ULIP, let me tell you that these guaranteed NAV products are best avoided. For details, you can read this post on my blog. Now to the Smart ULIP(II), the brochure provides a hazy picture of the whole plan. But what is clear is that
      1. There is a massive fee/charge of 0.5% per annum of fund value to pay for your guaranteed NAV feature. So basically, you pay for it out of your own pocket!
      2. Though the fund objective is not clearly mentioned, it does point to the fact that to cover guaranteed NAV, the plan will be going the play-safe-book-profit kind of money management. That will result is lower than comparative returns over investment period.

      As a thumb rule, NEVER buy any financial product that
      – Looks too good to be true
      – You can’t understand it well.

  5. Accord said, on April 10, 2010 at 3:50 pm

    now even sebi thinks ulips are not okay as they are being sold right now

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