THE hallmark of a great salesman is that he never lies. What he does however, is sometimes hide the truth which may be infinitely more dangerous. So, never pay attention to what you're being told, look instead for what you're not being told.

Every Unit Linked Insurance Plan (ULIP) agent worth his salt will tell you that ULIPs are great investments with great liquidity. You pay premiums for the first 5 years and after that you can withdraw all your money, which is tax free! So, you keep your money locked-in for a minimum of five years as per tax laws till the time you enjoy your tax benefits and then move your money elsewhere.

And you're ready to hug him and buy instantly because you desperately need a tax haven and liquidity. But hold on to that hug and most importantly that cheque!

What the agent might not tell you is that because of the high front-end charges on your policy, you may not be left with much to withdraw at the end of five years. We'll show you how:

ULIPs are by now popular for their high front end charges. That is, of the premium that you would pay in the first couple of years, the company would charge a heavy fee of anywhere between 20% to 70% on that premium. So if you invested Rs 10,000 as premium, the company would charge between Rs 2,00 to Rs 7,000 and invest only the balance in the first few years. The balance, therefore, could be as low as Rs 3,000. This charge is nothing but the agent's commission. Then there are other charges like administration charge and fund management charge levied every year. A sum total of all these charges means that it is going to take you quite a while to recover your principal invested, let alone get any returns. A little bit of number crunching tells us that even at a growth rate of 5% every year, it could take you at least 5 years to recover your principal. So what will you exit with at the end of 5 years?

• Don't buy insurance if you want to withdraw before five years. The withdrawal option must be exercised only if there is an emergency and that too after all other means have been exhausted.
  
  
• Buy ULIP only if you are prepared to lock-in your funds for a long time, that is, at least more than 10 years. Over a long term of 10 to 20 years, your costs will get evened out and the effect of compounding gives you good returns.
  
  
• If you want to invest for a shorter term, look at mutual funds, postal savings or even bank fixed deposits. Mutual funds and postal savings also give you tax sops.
  
  
• Don't buy insurance only to save tax. Assess your needs and then take the decision.
  

So, remember, look for what the salesman is not telling you. The local gelato sales guy once told me that gelato is fat-free and healthy because there’s no cream used. What he didn’t mention was the tones of sugar used which made it one of the fattiest things in town!

Must reads before you buy a ULIP:
ULIPs: When its okay to switch
Top ups give more
A la carte ULIP vs buffet endowment

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