Role of ULIP in Financial Planning

I have been visiting a number blogs since SEBI banned 14 private insurance companies from selling ULIPs and IRDA rejected the ban. Most of the bloggers welcomed SEBI’s decision and most of them concluded that ULIPs are bad investment products barring few who believe that ULIPs are good for long term.

The problem here is all of them consider ULIP (unit linked insurance policy) basically as an investment product while it is basically an insurance product. You can buy one of these policies only if you are eligible with or without medical examination to get the insurance cover. There are many points which these bloggers make.

1. Mutual funds are better than ULIPs. If you consider both of them as investment products, true… mutual funds are better but unlike cash value insurance products ULIPs give insurance cover for sum assured of large amounts and are basically insurance products.

1. They recommend term insurance plus MFs, great advice only for educated and financially sober Indians. But not many Indians like term policies; they want something back if they survive. Money for most is an emotional subject not rational. “Investor sentiment” not “investor logic” influences stock market.

1. They say life insurance agents are selling ULIPs aggressively because of huge commission. Wrong ……not all ULIPs give huge commissions and not all traditional policies and term insurance are low paying. In fact there is a unit linked policy which gives just Rs 200 for 50000 single premium.

1. Agents sell only the policies where the commission is more. Unfortunately true.

Unfortunately every one of them, the life insurance companies, the agents, the financial advisors, and most importantly the customers are ignoring the importance of life insurance here.

Life insurance should be the starting point of any financial planning. Term insurance is the best choice. Every good agent should try to educate the client about the importance term insurance, if you have an aversion to term insurance or you have a record of insurance lapses, then he or say may try to sell a ULIP.

Most of the ULIPs are sold because of the three year lock in period. This facilitates continuation of life coverage till there is enough fund in your account to cover the mortality charges. Keep in mind that you may lose some or all of your money if you stop paying regular premium at least for ten years.