One simple question

I was being followed up regularly by a company (where I hold a demat account) for an attractive investment option. When I asked for details, I got to know that ' It is a single premium product' and the returns from the product has been around 16% last year.

One more ULIP sale. I asked them one simple question. How much of the premium would actually be invested in the scheme??. The answer was that regulations on ULIP have changed and the invested amount has actually gone up. I wanted a quantified answer. If  I am say investing 1 lakh rupees into the scheme, for what portion do I get NAV allotted?

The answer was 94000. 

i.e. Out of the 1 lakh , I would invest ......The units allocated would actually be 94,000. Based on past returns , If the fund manager provides 16% returns next year then I would actually get the return of 16% in 94,000. (((6,000 gone somewhere immediately on investing  and my investment actually starts growing form 94,000)))

So, when you are sold any product ask this simple questions.

" How much of my money will actually be invested ??"

Ensure it's somewhere around 100%.  :-) and never club insurance with investment.

Highest NAV guarantee

Highest NAV guarantee is the new ad banner under which ULIP policies are being sold these days.

The following article is a must read before you decide to invest in such schemes.

http://new.valueresearchonline.com/story/h2_storyview.asp?str=101309

Make a sound investment decision based on your knowledge of the product and not based on advertisement alone.

Some small step from IRDA

The Insurance Regulatory and Development Authority ( IRDA) wants insurance companies to go slow on ULIPs ( Unit Linked Insurance products), especially semi-urban and rural areas. The immediate trigger for IRDA' s action emanates from public complaints , which stated the distributors had been mis-selling these products.Many unsophisticated investors were lured with offers of 30 percent - plus returns.- Source BW.

IRDA , at last has come with some step against the ULIPs. Ulips are a products are definitely costly products and not the best of the breed investment tool as such. Many plans were sold as 'top performing ULIPs' by showing the returns generated during the bull run. Still equity inflows into markets through ULIPs are sizeable when compared to investment through SIP in equity MFs. This is primarily because of the lack of awareness among the investors about the costs involved with ULIPS. Hope IRDA tightens it act further and frees the innocent public from the clutches of mis-selling insurance agents.

If you are planning to invest in ULIPs , Please take your time to read these articles ~ ULIP

Advertisements (to loot you???)

The very purpose of advertisements is to build a larger than life image of the products that is being advertised.

Insurance advertisements are most funny in that sense...1) The daughter gets admission in a university abroad , father surprises her by showing her the education policy which has multiplied enough to finance her needs 2) Dreams like owning a book shop or a house in goa can be fulfilled by investing in insurance policies 3) Father planning his retirement and being independent by investing in insurance.

On the outset, everything seems logical . But ,why the hell should one invest in equity/debt through an Insurance ( ULIP) policy.??. Insurance is definitely essential to protect the family against unforeseen events. It is essentially to mitigate the risk ( of uncertainity to life or health). But shouldn't become a major investment avenue. I am waiting for a day to see where I see some real sense in Insurance ads. ( Ads which show Insurance taken purely to cover risk)

If you use ULIP as an investment tool, you are really not putting your money to perfect use. it's better you don't club insurance and investment. There are always better ways to invest in equity/ Debt...( Like SIP in MF , POMIS, FD, etc)

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ULIP Vs MF SIPE

ULIPs

Recently read a news item that inflows from ULIPs to stock market could be around $15bn in 2009. Great news that so much money is coming in to the markets . But the sad part is so many investors have taken an uninformed decision of investing in equity through the wrong route.

A significant portion of premium money goes into paying hefty commission to insurance agents and other costs and Insurance is clubbed along with investment to hide all these costs.

I wouldn't only blame the agents. Investors also should try to do a basic analysis before they put across their hard earned money into such costly products. ULIP may definitely give returns but unfortunately not the full return that the investor deserves.

High time IRDA does something like the SEBI, by waiving the unnecessary entry loads.

Read the following articles if you need more insight on ULIPs

The most mis-sold financial product

Do not club insurance and investments

ULIP Vs Mutual Funds

ULIPs are Unit Linked Insurance Policy

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Search paths to this blog

On analysing the recent search paths to this blog , two searches still stand out . They are 1) ULIP compared with SIP and 2) How to make money in stock market.

For beginners ULIP is Unit linked Insurance Plans which invest in units as desired by the investors. ULIPS are Insurance cum Investment Plans. SIP is not an investment instrument but an investment method to invest in Mutual Funds. You can regularly invest in equity mutual funds through SIPs. ( Read posts labelled SIP, Insurance and ULIP for more info).

SIP definitely scores over ULIP as an investment.

Unfortunately, the trend reflected through data is not that great. Data from preceding month shows that flows ( into equity market) from insurance companies (ULIPs) into equity were four times greater then flow from MFs. It's a good sign that people have realised the power of equity, but still we have to mature in terms of understanding and choosing the right instruments.
To answer the second question, Investment in equity mutual funds through SIP is the best way for retail investors. You need to spare time and need to have patience to achieve your long term goals in this route. Happy Investing!.

Readers can feel free to write to us or comment on the posts regarding any questions/ clarifications.

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ULIP options

Investors who have invested in ULIP (Unit Linked Insurance Policy) have an option of choosing units from income, balanced and equity units. (some give a few more customised options too!)

This choice is given at the time of applying for the plan. Options can also be changed during the lifetime of the policy with most of the insurers.

1) Which option is best?

Since ULIPS are all supposed to be long term investments, 100% allocation to Equity units( growth option) should be the obvious choice. Even if you are an extremely conservative person , you should opt for at least 50%of your money to be invested in equity.

2) Most of the insurers give a 'Premium Redirection' and 'Switch' option. What is the difference between the two?

' Premium Redirection' can be used by the policy holder to divert all further premiums in a different proportion into income/balanced /growth than what he has already opted for. For example If I had opted to invest 100% of my premium into balanced units and I choose to buy only 100% equity units from further premium , I can give a premium redirection instruction.

'Switch' is switching of existing units in a policy from equity to balanced, income to equity,etc.

3) How often should I keep switching to units in a policy?

If anyone can predict the highs and lows of a market , he can do a great switching job. But no one can do this perfectly. So, it is always better to stay with your option unless there is a major change in economic scenarios or change in your risk appetite. Frequent switching wouldn't help you grow your money faster( unless you are extremely lucky!!) (Time or Timing ?? Market )

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Call from a ULIP company

Of late, the calls that I get from ULIP companies have increased by leaps and bounds.

All of them promise very high returns on the these insurance and investment plans. The Best way to tackle these guys is to ask for a letter in writing that I would get these returns.

I think IRDA ( Insurance regulators) need to take much more sterner action against these companies and agents who miss sell through false promises and propaganda.

Unless the buyer's get aware of what they are buying and what they are paying...these extortionists like Investment agents and real estate agents are going to take innocent investors for a toss..

With respect to Investments, Innocence of the investors is not definitely a bliss for himself.

KNOWLEDGE IS POWER for an investor.

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Hits from Google

ULIP Vs Mutual Funds

On analysing terms which hit upon this site from google we found ,Most of them have come over here searching for terms on

UILP VS MF
Compare ULIP and MF
Advantages of MF over ULIP
ULIP Vs SIP

This shows that at least some people are doing enough research and understanding the financial products before they are investing.. Way to go!!

URL for the article pasted below.

ULIP Vs Mutual Funds

Also more on Insurance at http://ideasmoney.blogspot.com/search/label/Insurance

ULIP Vs Mutual Funds

Was going through an interesting article on ULIP VS MF. It stated five reasons why ULIPS donot score over MFs . They are

Higher Agent Commissions
Costlier exit options:
No Track record:
Larger Commitments:
Insurance versus Investment:

For more details

http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/Analysis/Five_key_reasons_why_mutual_fund_schemes_score_over_insurance_ULIPs/articleshow/2190289.cms

The most mis-sold financial product

We strongly feel that ULIP is the most mis-sold financial product in the market. We have seen a lot of individuals who have ‘invested’ in ULIPs without even knowing the ABC of what it is. Most of the folks who sell ULIPs are even unaware of what they sell. The thing often repeated by the person’s marketing these ULIPs are ‘Growth fund of our ULIP has yielded returns above 40% for the last three years consistently’. People get sold immediately and later grieve over it.

One of the oldest player in Insurance industry sold a ULIP plan and made news before a couple of months. Thanks to its agents who mis-sold it effectively. IRDA (Insurance regulator) also made a public statement on this one condemning such practices. Such things wouldn't help unless the buyer is AWARE and AWAKE.

We went through the brochure of a ULIP plan and found out the following charges being levied.

1) Premium allocation rate for the first year was 40%.(i.e. , if I invest 10000, only 4000 will be invested…guess what happens to Rs 6000 !!!.The premium allocation however gets better over a period of time)
2) Fund management charge. (Around 1% p.a)
3) Surrender charge for early surrenders.
4) Policy administration charges. (Rs 20 per month!!)
5) Mortality charges (for getting you insured)
6) Switching charge ( growth to balanced switch ,etc) Rs 100 for each extra switch
7) Partial withdrawal charge.
8) Revival charge (Rs 250)
9) Miscellaneous charge on top of it. ( charges for any alteration in the contract!!)

And nobody tells that the 40% plus return has been because of the phenomenal stock market performance and the same can’t be expected year on year.

The best thing is to have a term insurance policy for covering your life and invest through SIPs in mutual funds, if you want to get the benefit of equity (where the cost of investment is only the entry load and fund management cost, which may add up to 5% p.a on the higher end).
When a ULIP sales person calls you next time, be ready with the right questions.

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Nice article on ULIP

In the recent past, there was an article published in rediff on ULIP. ( Unit Liniked Insurance Plan - Insurance plan which has units that can be invested either in equity, debt or a combination of both)

The author had reasonably given a fair idea of what a ULIP can do for you(!!) based on your level of awareness.

The experiences of various people put up by way of comments was also extremely educative.

I would say , it is a MUST for everyone who wants to invest in ULIP to go through this article and especially the comments by various people.

http://www.rediff.com/money/2007/feb/02perfin.htm

Do not club insurance and investments

Most of us tend to club insurance with investment. Many of us invest in cash back policies when going for insurance . This is not a great idea.

Always prefer "term" insurance policies only. Use insurance only for covering risk.

What is term insurance?
When you put your money somewhere, you expect something back. With a term life insurance, that is not the case. If you die, your nominee gets something. If you live, no one gets anything.

Advantages:-

Premium for term policies are lot lesser than non-term policies.

You don't incur a hefty commission cost on the higher premium paid for non-term policy.

Insurance is used only to cover risk and you can decide other modes for investing your money.

if, term-policy is not advised by any of your broker/LIC agent , then he is more keen on his commission than your personal interest.


Like all financial dealings, "UNDERSTAND" the product before you invest and always have in mind that "Insurance and investments must be mutually exclusive".

What about insurance for retirement planning , child's future planning , etc ..?lets discuss that in the forthcoming articles.



Please write to ideas.money@gmail.com if you have any questions


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