Think again if you are stoping premium after three years in ULIP

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As per the poll on my blog, ULIP are currently most favored insurance product in the Indian insurance market.

However it is sold in the wrong way and in the same time those who buy doesn’t care to understand it.

A typical way which explain how almost all the ULIP are sold in India.

“You need to pay premium only for three years and can withdraw your money anytime after 3 years. You can continue paying premium but it is not compulsory.

Even if you stop paying premium after 3 years you will continue to get all the benefits. With this policy you will get insurance as well as high return due to its market exposure.”

By explaining this your advisor has not said anything wrong, ULIP, a very flexible insurance product allows the liberty to withdraw money, stopping premium , high return and many more….

But what your financial advisor will not tell you is ULIP charges high during first three years, it continue to charge you even if you stop premium which intern means indirect capital depreciation.

Let us take it by example…

ICICI Life Time Gold which deducts high allocation charge of 20% of premium amount in first year, 7.5% in second year and 4% for the rest of the term.

For annual premium of Rs. 10,000 following amount gets invested.

1st year: Rs. 8,000.

2nd Year: Rs. 9750.

3rd Year+: 9600.

Overall in the first 2 years out of Rs. 20,000 only Rs. 17750 get invested.

(This excludes various other ULIP charge like insurance charge, fund mngt. charge etc…).

However from 3rd years onwards charges gradually come down to 4%.

In order to enjoy actual benefit (or to compensate the loss of your capital in initial years) of ULIP one need to continue with the premium payment at lest 7 to 10 years.

The second point is once you stop paying premium normally your ULIP plan will continue to give you all the benefits of insurance cover as well as high return, however one must note that to manage your policy, insurance company will deducts certain amount out of your account each year.

For eg. For Life insurance cover it deducts mortality charge.

To manage your funds it deducts fund management charge.

In this scenario if you stop paying premium inflow to your fund will stop however deduction will continue (units out of your account will be deducted as charges, for eg. If you have 1000 units in your account @ NAV of Rs 20 and all charges are Rs 500 then it will deducts 25 units so at the end of year your account will have 975 units).

This will reduce your maturity amount significantly and it may happen that your investment turns out to be negative.

Suggestion:

Although ULIPs looks very confusing it is a simple investment product if you know basics of it.

If you are buying ULIP

1) First understand it and it benefits w.r.t Traditional insurance plans.

2) Understand the charges and withdrawal terms.

3) They are for long term and so please pay premium for 7-10 years.

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1 comments:

S.Sujith LIC said...

LIC's Market Plus 1 is a better ULIP.

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