UNIT Linked Insurance Plans (ULIPs) have never been a good 'investment' product. We have said that over and over again, and there are valid reasons for saying that.

The reasons
1. The charges are exorbitant and payable upfront in the first 3 years’ of the policy
2. The 3-year lock-in may appear small compared to traditional insurance policies which run up to 15-20 years, but that’s not the right comparison. ULIPs should be compared to MFs, where the open-ended schemes have no lock-in
3. The flexibility is low. You can exit after 3 years, but you may be forced to stay with the ULIP because of paying the hefty charges initially.
4. You are dependent on the performance of just one fund. Instead, you could buy 4-6 MFs with the same money which you pay as premium and build a diversified portfolio and spread your risk.

Read more about how a ULIP functions .

Why does it sell?
There are many drawbacks but they are still selling, you might say. Insurance companies sell millions of ULIPs because of the following:
1. Belief in safety of insurance products. Unlike traditional policies, ULIPs are investing in the 'risky' equity markets.
2. The unexpectedly high returns from equity in last 2 to 3 years enabled ULIPs to show profit despite the high charges.

With the markets crashing, high returns have evaporated. So, now the reality is dawning on policy holders as they are sitting on huge losses. Besides, the loss in the market, the loss of thousands of rupees in the form of heavy charges is the worrying bit.

Should I close the policy?
The cost-structure in ULIPs varies significantly, not only across different insurance companies, but also across different ULIPs from the same insurance company.

So, each policyholder will have to work out the final exit/retain strategy based on his/her specific policy terms. However, there are three factors to be considered:
— Performance
— Entry Charges or allocation charges
— Annual Costs or fund management charges

The focus, here, is on equity-based ULIPs. And, the basic idea is to check whether it is better to continue paying premiums or instead start investing in MFs.

Read: Should I invest in ULIPs?

Illustration: Vaibhav Parekh

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e-mail: Sanjay Matai

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