In a finance blog there cannot be a better Red Flag, right? Hey why do I assume that you are a bull?

OK. Let me tell you a story.

A young man about 27 years of age decides that he needs about Rs. 5 crores of life insurance. He is just providing for his parents (not dependent), wife, and to be children (right now he has no children). He also realizes that he can afford to pay about Rs. 300,000 as premium.

However, he wants ONE instrument covering his risk, and creating wealth.

A nice well meaning Life Insurance company creates a product which invests 100% of the investible surplus in equities and creates ‘Unit Linked Insurance Plan’. Here is a custom built product, taking into account this person’s risk profile, the mortality charges, the asset allocation according to age.

As the person gets older, he is able to increase the premium, withdraw for his families cash requirements, and all this while keeping his protection needs intact at Rs. 5 crores.

Good product? Of course yes. It was called ULIP.

Cut to Athletics.

One coach does an analysis of his pupil’s requirements. Sees how much salt he loses for every work out. Based on that creates a PRESCRIPTION drink. Calls it a drink for HIS athletes.

Now go back to banking.

The life insurance company now sees that they can create a product called “UNIT LINKED INSURANCE PLAN” and sell it to 500 million people. So all the care in the structuring, pricing, asset allocation are all MECHANISED and sold through agents. 99% of the agents and about 100% of the end buyers do not understand how a ULIP is structured, how it is cost, what are the risks, and who SHOULD NOT BUY.

Suddenly you want market share, 30% year on year growth, ads, commissions of 67%, etc…..and the product is DEMONISED. ULIP now becomes a dirty product.

Industry now sells term insurance. However there could be ULIPs which are better than term !!

The MEDICINAL drink is then sold to a small company which was selling worth about US $ 400,000 then gets taken over by a Cancer agent which increases the sales to about US $ 5 billion.

Are you getting the drift?

Do you need ULIP? Is it a good product? the answer is YES if the following conditions are met:

1. the investment is in a good index like Nifty, Sensex, Bse 200 etc. ONLY INDEXING.

2. the management fee is competitive.

3. asset allocation is allowed many times.

4. good company, well managed funds, and low sales cost – which means you can buy it direct, ONLINE.

5. You understand reverse engineering of the cost of the product….

So if a nice customised product is mass made, even nectar can be made poisonous….

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  1. Mr. B, thanks to the regulator there is NO product that meets all the criteria. I bought a ulip with 0.8% amc charges, the sum accumulated is MORE than the sum assured (so no risk charges), – the works. I used to like the earlier fund manager. The current guy is a disaster. Stuck with it, right? very small amt as a %age of net worth so planning to stick around for 25 years…more out of academic interest…

  2. You said, investment in good index like Nifty / Sensex & management fees should be competitive. In that should i not go for pure term plan and SIP in low cost Index funds. That will reduce my cost considerably…

  3. I once bought a ULIP, it was a true ULIP…called LifeLink from 3IPru. Of course I had an advantage of investing exactly at the end of the dot-com crash – Nov 2001. My 20,000 became a lakh in 5 years. By Jan 2007, the plan had become something else, and I needed the money, so I cashed out.
    There hasn’t been a product like that before it or since. Looking back, I got lucky I guess.

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