Whenever we are asked to analyse anyone’s investment in ULIPs, we are reminded of how poorly they have fared. Here is what we had to say trying to explain why these might not be suitable for investment purposes:
Why we would not recommend ULIPs for investment purposes
Although there are many reasons for not investing in ULIPs (like higher costs, illiquidity, etc.), even their investment performance is not impressive. Let’s take the example of your own ULIP investments. Typically, out of the first premium of Rs. 1 lac, Rs. 30,000 would have been deducted as administrative and other charges by the insurance company. Thus, Rs. 70,000 would have been invested in the stock market in the first year. Second year onward, though, these charges get reduced and typically range between 2 – 5% of the premium that you pay. Accordingly, Rs. 5,000 would have been deducted from the rest of the premiums. Now let’s see what return did the insurance company earn on the money that was invested in the stock market.
Particulars ULIP Mutual Fund Amount invested in the 1st year Rs. 70,000 Rs. 1,00,000 Amount invested from year 2 – 10 Rs. 95,000 Rs. 1,00,000 Total amount invested Rs. 9,25,000 Rs. 10,00,000 Amount received after 10 years Rs. 14,00,000 Rs. 26,54,964 Compounded annual return 7.59% 17.23%
As you can see, in a ULIP, the insurance company ended up earning 7.59% every year, which is just slightly better than the after-tax returns of a Bank FD despite taking the risk of investing in the equity markets. Your actual return was even lower @ 6.04% (as you had invested 10 lacs) since you had to bear the brunt of the expenses of the insurance company as well. Over the same period, however, the mutual fund delivered a return of 17.23%. Here I would like emphasize that I have deliberately not taken the best performing fund. Moreover, the above stated return has been generated by the fund despite the severe market crash of 2008.
Apart from the high charges of a ULIP, another reason of their under-performance is the fact that insurance companies do not have access to the best of fund managers. Approaching an insurance company for your investment needs is akin to asking a general physician to cure a heart problem.