ULIPS, a risk shield for the long- term.
When you buy insurance, you protect yourself against untoward incidents by transferring the risk to a large pool of individuals. If anything happens to you, your family is financially compensated.
Unit-Linked Insurance Plans, or ULIPs, changed the way insurance was being sold. Instead of calling it a shield against risk, it was sold as an investment. The buyer ended up bearing the risk of market swings.
Many people buy ULIPs without understanding the risks and instead allow themselves to be guided by what the salesperson says, which sometimes is a misrepresentation of the product. You should watch out for these things when talking to a salesperson:
Guaranteed vs illustrative returns: Insurance salespeople may tell you that the product offers a ‘sure’ return or ‘certain’ amount over a particular time period. They may tempt you by saying, “Invest 50,000. Double your money in five years,” or “Let’s say you get 20 per cent returns. In five years your money will grow to so much in five years.” Can the agent guarantee you these returns? No! This claim is only ‘illustrative’. The agent makes some assumptions on how the market will behave. ULIPs carry market risks, and they invest in a mixture of debt and equity, depending on how much risk you are willing to take. ULIP did not guarantee that it would double your money in five years!
Are ULIPs for long term or short term?
You will get assured returns only if the insurer says so in writing, in the offer document! Let’s say that you chose the ‘pure equity’ option for a ULIP. You will have to carefully monitor the equity markets regularly if you want to reach your goal. Let’s say it’s a 10-year plan. Two years before the plan expires, I would suggest that you switch a sizable portion of the fund value to debt. This way you protect the corpus.
Are the returns exaggerated? The government’s insurance regulator, the Insurance Regulatory Development Authority, or IRDA, has asked all insurers to provide an example with every ULIP it sells. The illustration should project returns, assuming 6 and 10 per cent annualized returns. This way, the government makes sure that the company has explained things to you clearly before yo sign up for the policy. But remember, the returns that the insurer shows in the document is only for illustration and based on assumptions. It may or may not materialize. Also, the actual returns may be less, because you have to factor in expenses.
A 10-year-plan, in general, gives you a return of 5.5-6 percent, net of expenses that the insurer may charge, if it earns 10 per cent. The returns will be higher if the plan is a period longer than 10 years.
And That’s why you should read the product brochure carefully. It will list the expenses, such as premium allocation charges, policy administration charges, mortality charges, fund management charges. Let us say that there are two funds. One product charges a fund management charge of 0.80 per cent, another one charges 1.25 per cent. But the second one charges a lower premium allocation charge. Should you buy the second product because its premium allocation charges are lower? There are chances that the first fund will deliver a higher return because its fund management charge was less.
Should you close the policy after five years? ULIPs are meant for long-term goals. They are not a good investment if you investment horizon is short. Many agents will try to sell ULIPs as five -year products. They will tell you to close the policy after that . This, sadly, is a guaranteed way to lose money! The expenses will be high in the early years. The insurer may also levy charges for terminating the policy prematurely.Till lock-in you will not get refund from insurer.
An unscrupulous agent once gave such advice to a policy holder who had paid a total of Rs.52,000 over three years. Imagine the investor’s shock when the company told him that he would get only Rs.19,800.
Switch and redirect: When buying ULIP, you should understand the concept of switches and redirection. These options will help protect your corpus if the market is volatile. When the market is turbulent, shift the money from equity to debt plans. There are no charges for this. Similarly, when your renewal premium is due, you can have the company invest the fresh premium in the debt option.
ULIP can reject your claims: As the name suggests, ULIP is a product that comes with a life cover. But remember that the fine print says that the company can reject your claim if you have not met the formalities. For instance, one insurance company says that it rejects 20-30 per cent of the claims filed after a person’s death because the insurer had not disclosed certain facts when buying the insurance. Often, some unscrupulous agents will ask you to lie in the form to get lower premia. Never do that!
Never allow an agent to fill out the form! Make sure you understand the medical questions in the form and answer them truthfully. Would you rather lie and pay a lower premium only to have the claim rejected for not disclosing a condition, or would you instead tell the truth, pay more and have no problems in the end? There is nothing wrong in an insurance agent filling in the form, but read it carefully before you sign. Don’t allow the agent to rush you into signing anything without reading it. Take your time.
The form will ask you about your family case history, your occupation, place of work, diseases that you already have, your lifestyle habits, such as drinking and smoking. All these things are evaluated when the insurance company writes you a policy. Remember, the company is evaluating how risky you are!
So, don’t leave these details to the agent. He or she will not know these. Or they may say all that is not needed. This is not to say that all agents do that. Just be careful. Go through all the clauses and ask the agent to explain things that you don’t understand. If needed, take the form home and read it over a day since it is going to be dense reading!
Let’s say you accidentally mis-stated something in the form. You can rectify that in 15 days after you get the policy. However, if you want to instead return the policy, you will end up incurring some expenses.
Remember to pay your premia! In these days of intense competition, agents sometimes are lured by the rival company. While many agents are extremely helpful and professional, you should not rely entirely on them. If an agent leaves your insurer and starts working for some other company, he or she may not call you about paying your premia. Of late, many policies have lapsed because of this. So, companies are now reaching out directly to policy holders, sending them reminders. You can avoid the problem of forgetting to pay your premia by opting for the ECS debit of your bank account. Also remember that you should inform your insurance company immediately if you change the address to which all communication must be sent.