Sunday, 21 November, 2010

Major drawback of ULIPs

Major drawback of ULIPs

There have been multiple opinions expressed in different magazine articles, interviews, websites, etc. about ULIPs.

A majority of them have been focussing on two issues:

  • Mis-selling (especially due to the commission structure) and
  • High "charges" of different kinds, especially in the initial years.

However, of late, with IRDA tinkering with (or, to be more polite, changing) the rules to "limit the charges" and becoming more strict about mis-selling, lots of "experts" have started giving a more favourable review of ULIPs.

I disagree.

And disagree strongly. Here's why:

  • ULIPs involves combining investment and insurance, which I consider inefficient and hence dislike.
  • ULIPs involves long-term commitment, often practically irrevocable long-term commitment. I dislike such long-term commitments in the world of investments for the following reasons:
    1. New investment products may emerge in future, with much superior features, potential for returns, security, liquidity, etc.
    2. The fund managers managing your ULIPs may change - The new fund managers may or may not be of the same quality
    3. Even if the fund managers don't change, new fund houses may come up with much superior fund managers, thereby adversely impacting the relative performance of your ULIPs
    4. Your income levels may change - upwards (hopefully) or downwards - Your intended allocation to different investment products ought to change accordingly. Unfortunately, ULIPs don't provide the flexibility.
    5. The limitations of exit/entry clauses are "difficult". ULIPs typically involve a "Growth option" (and not a "Dividend Payout" option). This implies that you don't have the opportunity to book profits and/or drastically increase investments to a particular asset class, viz., ULIPs. The allocation to ULIPs remains fixed. At best, you can change the percentage allocated to equity vis-a-vis debt.
Take care. Happy investing!



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