Khota Paisa

When To Exit ULIP?

Posted in ULIP by khotapaisa on April 17, 2010

Most of us buy & sell ULIPs based on the unsolicited advice of the insurance agent. The agent would convince us to buy a particular ULIP plan (and get 30% commission on it) and after three years come back with a new plan to replace the existing one (earning another 30% or so). The only person who gains through all this is the agent himself.  With the buy & sell going on, most of us want to figure out which ULIP is the best to buy. You would get countless writings on web on this subject. So, for a change, let’s try to figure out when to sell/exit a ULIP plan. Here are some conditions which will justify your exit from ULIP.

Money Crunch – You may need to surrender a ULIP if you have serious money crunch. In addition, you may realise that you can’t afford the premium. In this case you should preferably stop paying ULIP premium instead of surrendering the policy.

Poor Performance – You may like to exit a ULIP if it is consistently performing bad in comparison to the market. Though it is tricky to say when a ULIP qualifies for this, you should generally see the performance of a ULIP for few years before deciding. There could be exceptional cases where in a boom year your ULIP gave a return of 5% while other ULIPs gave a return of 25%. But then be sure about the poor performance of you ULIP before exiting it. Not an easy feat by any measure, I must say.

ULIPs – Towards A Bright Future

Posted in ULIP by khotapaisa on September 20, 2009

Few days back, I was talking to a financial advisor. During the course of discussion, he told me that from year 2012 onwards there won’t be any charges on ULIPs. Basically, ULIPs will be on the same level as the mutual funds today. I am not sure how correct is this but I would be delighted to see it happen. This, in my opinion, will be the single best development in the investment world till date. This may sound like an over-statement but let me explain you the reason. Of all the investors who invest in equities, a large majority are the salaried class. In fact people with lots of money hardly invest in equities. They just put all their money in FDs. The reason why a common salaried person invests in equity is that he/she has to fulfill his/her financial goals (child education, marriage etc) which can’t be achived just by the current income source(s). Owing to the eagerness to earn more thru euqities, these investors end up chasing return. This results in a regular crunching of portfolio which eats up all the returns. So the single biggest enemy of the common investor is the churing in portfolio. And this is where the ULIP comes to the rescue. Unlike mutual funds, ULIPs don’t provide the option to churn. It also brings a certain level of discipline in the investor. With all the charges gone, ULIPs may well become the preferred choice of equity investment. At least I would, then like to see people prefer ULIPs over MFs.

The New Face of ULIP

Posted in ULIP by khotapaisa on September 11, 2009

IRDA recently propsed capping of charges on ULIPs. As per the new proposal, the total charges on a 10+ year policy can’t exceed 2.25 percent while the same can’t exceed 3.0 percent on a 10 uears or less policy. It excludes mortality & morbidity charges. Let us now try to see what impact it will have on the investors. Even on a cursory look, it is clear that the effective return of ULIP plans will improve because of the cap on charges. To understand it better, let me take an example of an ULIP, say SBI Unit Plus II. 

Sample policy details –

Annual Premium : 25,000/-
Policy Duration : 20 yrs
Investment : Full Equity
Maturity Value (@ 10% RoI): 1,084,069/-

If we apply the proposed cap on charges, the investor will have a maturity corpus of about 1,112,500/-. This is an increase of ~2.5%. While it may not be a large gain, it will be much higher for most of the existing ULIPs.  This is so because this ULIP has comparatively much lower charges. Overall, it is going to be very beneficial to investors and help move ULIPs a step further towards competing  with mutual funds.

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).