Investing through ULIP

Last month, a friend of mine, who was a young software engineer in his early 30s, decided to start investing. I thought that all my lectures to him on the complex effect and early investment benefits paid off. But fate forced him to go to a private bank to open an FD and return home with a ULIP policy. Realizing this fact, I conducted further investigation and found that all agents of Indian private banks discouraged their prospects of buying fixed deposits and persuaded them to go for ULIP. In addition, they claim that this is a three-year investment with free insurance of — amount and guaranteed return on donation. This month, even after all the battles between SEBI and IRDA, nothing has changed in this business. Banking agents are still singing about ULIP’s USP as an investment proposal.

Here’s what these agents won’t tell you:

• ULIP is not an investment, but an insurance plan combined with several market advantages.

• ULIP is a very focused tool for very specific needs, it should not be treated as a high return alternative to bank funds. In fact, it is not even an investment instrument.

• There are no safe returns to ULIP.

• This is much more risky than the underlying investment, because even if the underlying investment gives a negative return, banks still deduct all administrative fees.

• Combining the above fact with the current period of delay, the return of many investors reached -100%, ie. their policy became void.

• Most of the ULIP premium paid in the first three years is spent on administrative costs such as agent fees, fund manager fees, insurance premiums and other fixed costs. As the agent cannot receive any commission after these three years, they claim that ULIP is for a fixed period of three years.

So, ULIP is NOT suitable for you if:

• You are at a very early stage in your career and do not have many financial burdens

• You already have a good insurance plan either individually or through your employer

• Your only need is a good return on hard-earned money

• You do not want to link your investments to market risk

• You have the time and understanding to invest in the stock markets and make money

• Your investment needs are less than 10 years

• You have some huge and predictable costs over the next three to five years

Unfortunately, my friend was hit through most of the above points, as he is 25 years old, works for an MNC offering insurance benefits and will get married in the next 2-3 years. In fact, most people are hit at at least one of the above points. ULIP is neither a good investment instrument nor an effective insurance policy, as it cannot match the returns of other market-based instruments, nor can it be as universal as modern insurance coverage. It is designed to deceive innocent customers.

-PS author is part of the Indian stock picking community and can be reached at or