ULIP- Why they are bad to invest even they are tax free?
ULIP is not good to invest even the maturity is tax-free. People now think Unit Linked Insurance plan is better as equity mutual funds have capital gain tax.
But these people are wrong.
In Budget 2018, the Government of India re-introduced capital gain tax on equity mutual funds.
Now, you have to pay tax if your withdrawn profit from equity mutual funds is more than 1 lakh, then you have to pay 10% as capital gain tax on the over and above 1 lakh profit.
But, at the same tax benefit on Unit Linked Insurance Plan Maturity is kept tax free as earlier.
Here, comes the real catch, and the Life Insurance Companies started selling this as a selling point and mis-leading people.
Banks are the biggest mis-sellers of ULIPS.
Never go to a bank for investment and do not ask Bank Relationship manager about savings investment.
You will be cheated at Banks.
Let’s Understand more about it…
Life Insurance Coverage in ULIP IS very low…
All of us will be having some dependents and some financial goals.
Living short is a big risk and if we die early all the dependents and our financial goals will be compromised.
Hence, To protect such risk we need life insurance policy sometimes in crores.
But, If you take ULIP then life insurance provided by it will not be sufficient for you.
So, for life insurance coverage purpose you should not buy ULIP.
Instead, you can go for a term life insurance to get higher protection.
You should not mix Life insurance and investment…
I already wrote an article about why you should not mix your investment with life insurance by taking the example of endowment plans in Life Insurance Companies. Click here to read the article.
So, Life Insurance Coverage wise ULIP is not a good product to have as it will provide very low insurance.
There are two methods to know how much life insurance coverage one must-have. 1. Human Life Value 2. Need-Based Method.
I have created an Online Calculator for Human Life Value on my website. Click here to calculate your value.
What is ULIP Features…
ULIP is like a mutual fund with the additional benefit of insurance coverage.
ULIP can be like a Debt, Equity, Hydrid Mutual fund.
But ULIP benefits and management will be different from Mutual funds.
How ULIP will perform?…
Do not ask the performance of ULIP, because the majority of the ULIPS will not perform well when you compare with mutual funds.
You can track the performance of ULIPS on the Morning Star website.
Let’s analyze a ULIP called HDFC life click 2 invest to understand more…
What is the Death Benefit under HDFC Life click 2 invest Ulip plan?…
In case of the death of the policyholder, then the nominee will be paid higher of the following…
What are the various funds available in this ULIP?…
As I said earlier, this HDFC ULIP has different investments like a Mutual Fund.
They are as shown below…
What is the return from Hdfc Life click 2 invest ULIP?…
The return from Hdfc Life Click 2 invest diversified plan is shown in the below image…
But if you see above returns, the returns are not the same for everyone who invested in this scheme.
As the returns are eaten away by the insurance mortality charges in this plan.
Moreover, these charges vary for different ages.
Hence, the return also varies from person to person.
What are the Mortality Charges in this HDFC ULIP PLAN?…
usually, In ulips these mortality charges will be debited from the fund value every month to provide insurance coverage and these charges will increase every year based on the age of the policyholder unlike in Term life insurance where the premium is fixed every year.
HDFC click 2 invest following the following formulae to calculate insurance premium…
If see above table and chart it is very clear that the Mortality rate at age “0” is high and decreases till age 13 and again started increasing as deaths are higher being a child and low when we are young and again it is high and increasing from age 13.
Hence, if a person takes this ULIP at age 40 to 55 years, he has to bear these mortality charges and as a result of these charges, the return for them will be very little.
The insurance company will recover these charges by selling your units every month.
Life Insurance companies will stop charging these mortality charges once the fund value crosses sum assured.
But it will take 10 to 20 years to happen.
So, it doesn’t sound great to invest in this kind of ULIPS.
What are the fund management charges in Hdfc click 2 invest?…
Earlier, Life Insurance Companies used to charge complex administration charges and Premium allocation charges.
Now, those complex charges are not there.
Instead, HDFC Life Insurance in this plan charging 1.35% as Fund management charge per Year which is charged daily similar to Mutual Funds.
Here, some people argue that these charges are very similar to direct mutual fund management charges.
But you have to look at other factors like performance and flexibility in investing and switching also.
How to switch in Hdfc click 2 invest ULIP from one fund to another?…
Hdfc click 2 invest is offering 8 different investment options…
An investor can switch within these 8 funds only.
The fund manager will be the same for all these 8 different funds.
Hence, You do not have the choice to change the fund manager if you do not like the performance of the manager.
While at the same in Mutual Fund, you have the flexibility to changing the scheme and also fund manager.
Conclusion…
So, investing in Unit Linked Insurance Plans just for the sake of tax-free maturity at the end doesn’t seem sound after seeing the above data.
Instead, take a Term Life insurance on need-based analysis and invest balance money in other assets like Mutual Funds based on your risk tolerance and financial situation and invest keeping a goal in mind for your investment.
If you do not have that expertise to do yourself, then take the Sebi Registered Investment Adviser service and plan your Financial Goals.
Read an article about the 8 benefits of filling I.T Returns. Click here to read.
Also, read an article about Lic vs Pli which is best. Click here to read.
Also, read an article about New Jeevan Anand-Why you should not invest?. Click here to read.
