Why ULIP Policies Are Bad Investments

During the financial crisis of 2008-2009, the banking/insurance companies invented Unit Linked Policies, otherwise known as ULIPs. ULIPs were marketed as great insurance-cum-investment policies that allow the common man to enter the stock market and still provide the insurance benefits. Some ULIPs also claimed to protect your downfall risk by allowing you to lock at higher NAVs. While this may sound like a reasonable thing to do, such policies aren't so simple as they are made out to be.

Why ULIPs Are Bad?

ULIPs are bad is because they combine insurance with investment. The goal of any investment is to make money. The goal of any insurance policy is to keep your family protected  in the event of your death. So, combining insurance with investments into one ULIP policy ONLY worsens both of those things. Remember that, for any insurance company to give you highest returns possible while at the same time giving you highest insurance protection is next to impossible. They can only give you one, but not both. So, when they combine the two items like in ULIP, you are ONLY getting mediocre returns on your investment and ONLY smaller insurance cover. There is no such thing as free lunch.

Secondly, ULIPs are inflexible, because, once you commit, you need to keep paying for a certain number of years or lose your entire premiums if you do an early termination. Also, when you terminate, you will be charged with lots of fees, which will reduce your returns.

People who sell ULIPs also advise customers that ULIPs work best when invested for a longer period of time with multiple investment options. This is certainly true for any investment. But, if you dig a little deeper, such statements are made only to benefit the insurance salesman. In the long-run, you returns will come out higher if you invest separately in the stock market and take a separate insurance policy.

So What Should You Do?

Instead of a ULIP policy, purchase a simple term-life insurance policy. In term-life insurance policy, you pay premiums for getting yourself insured. If you die, your family gets a lump-sum amount. If you live, you don't get your premiums back. But, your goal should NEVER be to get make money from the insurance anyway.

You should instead make your money through your investments. Simply, open a mutual fund account through a company like FundsIndia. Start investing in some of their pre-packaged mutual funds if you are inexperienced. Very soon, compounding will begin taking effect and your investments will generate more income than a ULIP policy would ever be able to generate. Plus, investing in mutual funds directly (as opposed to through a ULIP) provides with a greater flexibility. If you think, you have made enough money, simply sell your funds and take profits without giving out charges and losing a chunk of money. In other words, you are in control of your destiny with mutual funds.

Lastly, when it comes to investing, remember to KISS (Keep It Short & Simple).

NOTE: Insurance salesman will make every effort to sell you endowment policies like Jeevan Saral or even a Money-Back policy. These have the same problems as I described above. Only difference is that they invest differently.Read my experience on LIC Jeeval Saral and LIC Money-Back Policy.)