I recently wrote about why ULIPs aren’t a great investment for my Rupee Rani column and I thought I’d write a quick post here talking about my own ULIP experience.
ULIPs or Unit Linked Insurance Plans combine insurance with investment. Basically, insurance companies collect money from you to invest on your behalf while they also give you life insurance cover. So, it’s like a Mutual Fund in a way, with an amount of money that is promised to your family in case you die (how cheerful!). I was made to invest in one back in 2012 because of my incredibly pushy bank branch manager and my inability to say no back then. I’ve only regretted it since. For starters, the money doesn’t come back to you until the policy period matures and retrieving it before it does is an incredible pain in the ass. So I’m stuck paying premiums until 2019 and will only receive the returns in 2022.
The second reason is something that I realized more recently. It is the amount of money that you will have to pay in “Charges” for your ULIP – basically, they’re the Insurance company’s expenses that are not invested on your behalf. They are exorbitant and more importantly, insurance companies are incredibly sneaky in the way that they portray them to be minor.
How to calculate charges on ULIPs
One way to find out how much you’re paying in charges is by reverse working the GST that you pay on your premium. This is because GST is levied only on charges in a ULIP, and not the investment component. So, let me give you the example of my own ULIP. My policy’s premium payments are for 7 years and I pay roughly ₹5112 every month towards my policy. So,
One Month Instalment: ₹5112
One Month GST at 18% : ₹112
One Year’s worth of GST paid: ₹112 x 12 = ₹1,344
7 Year’s Worth of GST Paid: ₹1,344 x 7 = ₹9,408
If 18% is 9,408, what is 100%?: 9,408/18% = ₹52,267
Total money that goes down the toilet because of this shitshow: ₹52,267 + ₹9,408 = ₹61,746
MY GOD CAN YOU THINK OF THE THINGS THAT YOU CAN DO WITH THAT MONEY? You can invest it in other funds, you can put it in an FD, you can buy plane tickets to Europe, you can buy these gorgeous Valentino Rockstuds, you can basically do anything other than spending it on a ULIP.
But what about the insurance?
Let’s talk about the insurance cover. The sum assured for a policy that costs ₹4,20,000/- (without GST) in premiums is ₹3,50,000/-. A regular insurance policy (without the investment) will give me a cover of ₹1 Crore at a premium of approximately ₹10,000/- ANNUALLY for someone my age. That is literally 1/6th of my present cost!
Long Story Short
Don’t be fooled by ULIPs, friends. Insurance uncles will now talk about how Mutual Funds are taxed in the long-term and how insurance proceeds are tax free and that the contributions are tax-deductible (which is true), but trust me when I tell you that your tax outgo from Mutual Funds will be lesser than paying for these nonsense charges AND that certain Mutual Funds are similarly tax deductible without the crazy 10 year condition. It’s also important to remember that ULIPs are a lot more opaque in terms of where they invest in comparison to Mutual Funds. If you’re young, earning good money and looking for ways to invest – just don’t put your money in a ULIP.