Why you should avoid the ULIP trap

This time of the year is typically when ULIPs are pushed by insurance agents the most. With the 31 March deadline looming, a lot of people make tax-saving investments in haste. This makes them susceptible to marketing pitches that promise the best of everything. The same is the case with ULIPs.

ULIPs are unit linked insurance plans that are said to be the perfect mix of insurance and investment. However, they are far from the ideal financial product that they are made out to be. In reality, ULIPs are complex and expensive. They are touted to give you both insurance and investment, but actually fail to provide the best of either of the two. Insurance and investment are very different and serve very different purposes. They are like chalk and cheese, and shouldn’t be mixed.

The purpose of insurance

Insurance is an expense you pay to guard your family against emergencies. Insurance of any kind promises a reimbursement at the time of loss. In case of life insurance, which is a component of ULIPs, the reimbursement happens at the time of the policy holder’s untimely demise. This should be the sole purpose of life insurance–to help your dependents come out of their loss without having to face a financial crisis. Life insurance should not be looked upon from the angle of generating returns.

The purpose of investment

Investment is what should be looked upon from the angle of generating returns. While insurance is an expense, investment is a strategic bet you place to allow your money to grow. You invest to build a corpus for specific goals and objectives, which could range from long-term goals like your retirement or a child’s wedding to short-term goals like the down payment for a house or a vacation to foreign shores. The type of investment you make would depend on the type of goal you have. An investment can also be changed or replaced if it isn’t working out well enough.

This is how insurance and investment differ from each other, and so do the reasons to have them. ULIPs promise a mix of both and therein lies its basic fault. The best kind of life insurance is term insurance, which is cheap. The best kind of investment depends on your time horizon and goal, and should be understandable. ULIPs are expensive and not transparent. How much of your money goes towards management expenses, how much towards insurance and how much is invested where is not clear at all. Why would you want a product that does not clearly tell you what it does?

It is better to just avoid something than get into it without understanding the product details. Especially when you need to make a rushed tax-saving investment decision and don’t have much time to take an informed decision.

So, when an insurance agent tries to sell you an ULIP before 31 March, just tell him to come back later when you have more time. Right now, to fulfill your tax-saving obligations under Section 80C, simply invest in ELSS funds, PPF or tax-saving FDs.

Here is a quick 5-minute guide to help you pick the right tax-saving investment before 31 March.

This article was published on DNA Money on 23 March 2016.

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