Are Ulips better investment now?

When a senior manager from a life insurer wrote a guest column on Ulips in the Economic Times in March this year, there was a tide of angry responses from readers.

"Never invest in a Ulip. I've invested Rs 2 lakh in the past five years and my fund value is only Rs 1.5 lakh," wrote Andy from Mumbai.

"Suggest a Ulip only to your enemies," wrote Joe from Bangalore. "I have lost so much in Ulips. This stupid instrument should be banned by the government," pitched in SCD, from somewhere in India.

It's easy to understand the angst of these investors, who were mis-sold Ulips by agents painting a rosy picture of the future. Ulips have been the most sold, as also the most mis-sold, financial products in the past 5-6 years.

Buyers were not told about the high charges their policies levied in the initial years, nor were they warned of the risks of investing in equities. It is not surprising that the fund value of policyholders like Andy is 25% lower than his principal investment.


What's surprising, however, is that the poor image of Ulips continues to haunt buyers even though regulatory changes have removed most of the shortcomings of these market-linked plans.

In their new avatar, Ulips are certainly more customer-friendly and transparent. "The Ulips have been bashed so badly that very few people want to buy them anymore," says Deepak Yohannan, CEO of Myinsuranceclub.com.

On the other hand, the capping of the charges on Ulips has led agents to avoid these low-commission instruments. In 2011-12, barely 15% of the total premium from new policies came from Ulips, down from almost 75% in 2007-8.

It's true that these market-linked plans are not the best investment option available in the market today. Other investments can yield the same results at a lower cost. Mutual funds are a simpler and cheaper option for wealth creation. You can save tax through 5-year bank FDs or PPF.

A term plan gives you a bigger insurance cover at a lower price. Even so, Ulips offer the convenience of combining everything into a single product. They also offer a host of benefits over other investments.

However, don't rush in and buy a Ulip without understanding its features or how it works. Here are a few points that buyers should keep in mind when they go shopping for a Ulip: Not the first policy: A Ulip should not be your first insurance policy. This investment-cum-insurance plan should be bought only if you have purchased enough insurance cover (roughly 5-6 times your annual income) with a pure protection term plan.

The simpler the better: There are several variants of Ulips in the market today. Some of these are structured products, which offer you a guaranteed highest NAV or capital protection. It's best to invest in a plain vanilla Ulip that invests your money in equity, debt and cash in the proportion decided by you. Just like a capital protection mutual fund cannot outperform a diversified fund, a structured Ulip may not be able to match the returns that are generated by a normal policy.