When buying ULIPs makes sense…or does it?
Either I am being very touchy about ULIPs or Endowment plans in general or too many pro-ulip articles are appearing in the print media also. The big worry about using numbers in an example is to know enough about statistics – mean, median, mode, standard deviation and NOISE. Noise is the distortion that is caused – or the insignificance of the change being attributed.
Let me give you an example. If suppose I ran the Standard Chartered Half Marathon this year in 2 hrs 50 minutes and ran the last marathon in 2 hrs 57 minutes. Suppose I had a rice diet on the previous day of the race last year and wheat on the previous day of the race this year…and come to a conclusion that WHEAT IS BETTER THAN RICE for runners…THAT WOULD BE NOISE – I mean the difference is just not enough to come to such a drastic conclusion. There has to be a lot of data, analysed over long periods of time, over different types of runners…to come to any such conclusion.
Now it ET does an article and says – over a 20 year period in a plan of Mutual fund + Term Plan (Rs. 22,47, 076), and Ulip (Rs. 23, 38,167) – THE DIFFERENCE IS JUST NOISE. The difference is so SMALL that it is IMPOSSIBLE to justify ULIP instead of MF +Term.
The problem of ULIPs do not go away whether it is being bought for 20 years, 30 years or 300 years. Let us look at some of them:
– fund manager consistency or luck (as you wish to call it)
– if a ULIP does badly, bad luck, you are stuck with it.
-suddenly if you do not require life insurance, you are still going to pay the risk premium
– charges are so vaguely structured (for the common man) that removing some part of the money can make the whole deal useless.
– no term insurance is ever taken to its end. Surely somewhere in between you loose the need for risk cover – you can throw away a term insurance, but with a ULIP you continue it
No I am not freaking out on a UL vs. MF debate. I personally have a lot of investments in direct equity, ULIPs, mutual funds and also carry term insurance. It is about knowing how to buy…however here is an article, read on:
if it is a plug, it is a plug. Sorry too bad if ET carried it. Even the title is misleading…but well it is there.
Vishal
Subra, it is even more of a plug than this. I was also enraged after reading the article. Note that the article deducted tax from the MF but not from the ULIP. There is no reason to do this.
MF (ELSS) and ULIP both fall under 80C, both are only until DTC comes into effect, both have the same 1 lakh limit, shared with each other. But insurance companies paid ET a lot to deduct tax from MF but not ULIP.
The exciting thing is, even after this 20% initial advantage to ULIP, final amount is still almost equal. Which goes against the very idea of the article.
Ajay
The same article infers that PPF + Term plan is as good as ULIP :). Just a 1.3 Lakh difference at the end of 20 years
Moreover like subra said if we dont want the life cover anymore then we have the complete 50k for PPF investment too.
Smart Singh
This is some seriously lazy analysis! How can market-linked investments be compared to PPF with such certainty??? And as Vishal pointed out, how could you compare after-tax returns?