Returns on ULIPs are too good to be true- Why investing in them is not a Good Choice

What will an investor think when he pays Rs. 1 lakh one time, and promised to get upto 30% returns per year after 3 years. And when this kind of offer comes from most reputed insurance service provider like LIC, its just an icing on the cake. Recently, I saw a huge rush of people grabbing a limited time offer by LIC, the LIC Wealth Plus scheme. Just every other person I knew was buying one. It was a Unit Linked Insurance Plan (ULIP) which means a portion of your investment goes towards stock market and rest towards insurance. So, people thought they would get double benefits, getting good returns from the bullish markets and insurance cover as well. But all is not as rosy as told by the agents.


I will not get into all the details about the scheme but highlight few major points to explain my point that ULIPs are worst of the investment options, when you compare them with combination of mutual funds and term insurance plans and all the hype created around it is just to get lucrative commissions by the agents. In India, insurance is all about mis-selling rather than buying. Lets talk about LIC Wealth Plus. Highest Net Asset Value(NAV) in 7 years. Like if you invest Rs100, in 1st year, the value in the stock market of the shares bought by that money will be, lets say Rs110, next year Rs120, next year Rs 115 and so on. So you get the highest value, which may be at whichever time during 7 years. Insurance cover of 5 times the premium paid per year for 3 years, etc. It is sold as a win-win situation by the agents.

BUT, what they 'forgot' to tell you is that the commission to the agents and other charges can go upto 40% of the premium paid in the first year, and 15-20% in the subsequent years as no limit set by IRDA. So what actually gets invested in the markets is very less amount, so high returns on that amount(which also is not guaranteed) makes overall returns too low or even negative at the time of maturity. In mutual funds, the charges are fixed by SEBI(around 1.5% or so plus Rs200-700) so money actually invested in the markets is much higher than ULIPs.


Now, the insurance part of the ULIP. The cover is generally only 5-8 times of the premium paid. So, invest Rs 50000 per year in ULIP and get insurance cover of Rs 3 lakh. But, in 10 years life insurance plans the cover is normally Rs 10-12lakh for the same premium.

So if you compare ULIP with Mutual fund+ term life insurance, ULIPs are a total disaster mainly because of exorbitant commission and charges deducted by the companies ranging from 20-60% in the first year and 10-40% in subsequent years. So it takes 4-5 years MINIMUM to break-even on the investment made, let alone any profits, in case of a very good stock market. So chances are high that you get negative or minimal returns on the investment in ULIPs rather than the huge returns promised by the agents.

So beware of the advice of your agent and be aware of the (no)benefits of ULIPs before investing in them next time and help your parents too. Because their money is your money, after all :)


Written By- Rahul Bansal

A detailed step by step explanation given here.