4 ULIP 'sales pitches' you must know & Some Tips

Given the trend in recent times, there is a fair chance that the advisor would recommend an unit-linked insurance plan (ULIP). In this article, we present 4 ULIP ‘sales pitches’ that insurance advisors are most likely to use and investors must beware of.

1. Premium has to be paid only for the first 3 years
Often insurance advisors pitch ULIPs claiming that premium payments need to be made only for the first 3 years. The policy will be in force even if premium payments are discontinued thereafter. That’s only part of the picture. The other relevant bit is that, though the policy will continue to be in force, mortality charges will be deducted from the ULIP’s corpus in the future as well.

Put simply, the insurance company will continue to make necessary deductions from the policy’s total accumulated money. Hence, the accumulated amount will continue to erode with each unpaid premium. Only the balance amount (net of mortality charges) will continue to be invested in the markets. Furthermore, when the ULIP’s corpus is insufficient to service the mortality charges, the policy will cease, thereby depriving the investor of an insurance cover.

2. New ULIPs make cheaper buys
Mutual fund distributors have been known to mis-sell new fund offers (NFOs), i.e., new mutual fund schemes by using the Rs 10 net asset value (NAV) pitch. Investors are convinced that buying into an NFO makes a cheaper buy on account of the lower (Rs 10) NAV. Investors tend to draw parallels between stock investing and mutual fund investing and fall for the bait. In fact, this is one of the most common fallacies in the mutual funds segment.

Now insurance advisors have ‘borrowed’ the same sales pitch from mutual fund distributors for selling new ULIP offerings. Investors are conned into believing that buying into new ULIPs (which are market-linked investments like mutual funds) translates into a cost-effective purchase.

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3. ULIP investors are provided with dedicated fund managers
Like mutual funds, ULIP monies are also managed by fund managers. Fund managers are responsible for making investment decisions for the entire ULIP corpus i.e. for the monies invested by all unit holders in the given ULIP.

However, insurance advisors often claim that ULIP investments will be managed by dedicated fund managers. In other words, ULIPs are likened with investments under a Portfolio Management Service (PMS). In the latter, the investor has access to a dedicated fund manager who manages the portfolio in line with the mandate provided by the investor.

4. ULIPs offer guaranteed returns
ULIPs are market-linked investment avenues and are susceptible to the same risks that any market-linked investment avenue would. Broadly speaking, a downturn in equity and debt markets would adversely affect the performance of an ULIP. Of course, the fund manager’s skill sets, the ULIP’s portfolio structure and the investments will play a part in determining how it eventually fares.

Thanks to the upsurge in equity markets over the last few years, insurance advisors have begun pitching ULIPs as products offering guaranteed returns. Nothing could be farther from the truth. Investors should be wary of such fraudulent claims.

4 Steps for selecting the right ULIP

For a versatile profuct that is capable of adding significant value to investor's portfolios, unit-linked insurance plans(ULIPs) seem to have far too many critics. We have interacted with a number of investors who were very disillusioned with their ULIPs investments; often the disappointment stemmed from poor and inappropriate selection. We present a 4 step investment strategy that will guide investors in the selection provess and enable them to choose the right ULIP.

1. Understand what ULIP are all about:Do as much home work as possible bewfore investing in an ULIP. This way you will be aware if what you are getting into and make an informed decision. More importantly it will ensure that you are not faced with unpleasant surprises at a later stage. Fortunately for investors, the regulator has issued guidelines(on areas like sum assured and tenure), which have simplified the new breed of ULIP to a large extent.

Our experience suggests that investors on most occasions fail to realise what they are getting into and insurance agent/advisor's should get a lot of credit for the same . So you must gather information on ULIPs, the various options available and understand their working. Read ULIP-related information available on financial websites, newspapers and sales literature circulated by insurance companies.

2. Focus on your need and risk profile:Identify a plan that is best suited for you(in terms of allocation of money between equity and debt instruments). Your risk appetite and needs should be the deciding criteria while choosing the plan. As a result if you have a high risk appetite, then an aggressive investment option with a higher equity component is more suitable. On the other hand, if you are a low-risk investors, find you if the ULIP offers a minimum guarantee and the costs associated with the same.

Likewise, you existing investment portfolio and the equity-debt allocation therein also need to be give due importance before selecting a plan. Opting for plan that is lop-sided in favour of equities, only with the objective of clocking attractive returns can and does spell disaster in most cases.

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3. Compare ULIP product form various insurance companies:Compare product offered by various insurance companies on parameters like expenses, premium payments and performance among others. Make it a point to compare the ULIPs performance vis-a-vis comparable ULIP options from other insurers. Study the portfolios of various ULIPs across companies. expenses are a significant factor in ULIPs(Since they impact returns), hence an assessment on this parameter is warranted as well.

Wnquire about the top-up facility offered by ULIPs i.e. additional lump sum investments which can be made to enhance the policy's savings portion. This option enables policy holders to increase the premium amounts, thereby providing an opportunity to gainfully invest any surplus funds available. Find out about the number of times you can make free switches from one investment plan to another. Some insurance companies for instance, offer multiple free switch every year.

4. Go for an experienced insurance advisor:Select an advisor who is not only conversant with the functioning of debt and equity markets, but also independent and unbiased. Ask for references of clients he has serviced earlier and cross-check his service standards. when your agent recommends a ULIP from a given company, put forth some product-related questions to test him and also ask him why the products from other insurance should not be considered.

Insurance advice at all times must be unbiased and independent; also your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not be restricted to doing paper work like filling form and delivering receipts; instead he should keep track of your plan and offer you advice on a regular basis.