By Elda Christy

Prashant Shetty*, 32, works as a web developer in a media company and has been in the profession for six years. 

He was looking for investments that would also help him save tax, when his friend, an insurance agent, suggested he invest in a Unit Linked Insurance Plan (ULIP).

What his friend told Prashant: the policy would yield 'good' market-linked returns and would also take care of his tax investment needs. Also, he would only need to pay a premium for three years.

So, Prashant bought a policy. Let's take a closer look at the details. 

Sum assured	Rs 100,000
Policy tenure	20 years
Yearly premium	Rs 10,000
Current value in the fund	Rs 6,115

 

This was eight months back. Today, Prashant is unhappy with the product. The reason: the current value of his fund is Rs 6,115, even though the premium is Rs 10,000.

Where all the money went

ULIP is a combination of insurance plus investment; you can choose whether to invest a portion of the premium in debt or the equity market.

What usually fails to come to light: the high charges imposed by insurance companies. This could be anywhere between 2 to 100%! To know more about charges levied on unit linked plans, click here.

This amount takes care of the company's distribution charges, the agents’ commission, etc. But not many investors know about this.

“No doubt, insurance companies do mention the charges in the product brochures. But some agents may conceal information. Or they may not explain it clearly to investors. Even investors do not enquire about it,” says certified financial planner Arvind Rao. What Prashant pays:  

Policy charge in the 1st year	26.5%
Deducted amount	Rs 2,650
Actual amount invested in equity	Rs 7,350

To add to his plight, the fund underperformed. So, Prashant now wants to discontinue the plan. 

What agents don't tell you
Prashant was asked to pay a premium for only the first three years. Why? This is because the agent's commission is higher in the first three years.

In the bargain, Prashant is losing out. If he wants to withdraw his money after three years, he will not get much in hand, because the charges are usually higher in the first three years; this eats into a major chunk of the premium.

If the agent claims that the policy will continue even if you stop paying the premiums after three years, this means that the premium amount you paid in the fund within the first three years, will be used to keep the policy in force after you stop paying premiums! Once the amount in the fund is exhausted, the policy will automatically expire.

The road ahead

“If Prashant wants returns, he should stay invested for at least six to seven years and continue paying his premium beyond three years. On the other hand, he could just pay a premium for another two years and then surrender the policy. In this case, the returns may not be impressive due to the high front-end charges in the initial years,” says Rao.

Rao's advise to investors,"It is always better to keep insurance and investment needs separate. A term plan could take care of the insurance needs and a mutual fund for investments. But if an investor is still tempted to buy a ULIP he or she could look for low front-end charges offered by insurance companies.”