The structure of ULIPs ensure that they are useless for providing the amount of life cover that savers need
28-Feb-2018 •Dhirendra Kumar
The biggest problem with ULIPs is that if you use them to buy an adequate amount of real insurance, then you could consume most--or even all--of your income. Of course, I use the word 'insurance' to mean what it should do--money that your family will get if you die.
As a general rule, any earning person should be insured for at least ten years' income. However, life cover in ULIPs, almost universally, is exactly ten times the annual premium. Therefore, to get life cover equal to ten times your annual income, you will have to pay ALL your income as premium. The maths is unshakeable. No matter what the salespeople or the analysts say, anyone who has a family should not put even one paisa in ULIPs (or any other investment) before they buy a 10X life cover policy using pure term insurance. Once you secure your family's future with 10X your annual income, tackle investments as a separate and different kind of ball game.
Let me explain the numbers in detail. Suppose your post tax, in hand income is Rs 10 lakh a year. Then you should have a life cover of at least Rs 1 crore. If you think about what all your family will have to spend on if you die suddenly, then you will find this 10X barely adequate. Most families will actually need more. If you do not believe me, make an actual multi year budget. The good news (for you) is that such a 10X insurance is quite reasonably priced if you buy it through term insurance products. The bad news (for ULIP salesmen) is that buying Rs 1 crore life cover in the form of ULIPs will require an annual premium of Rs 10 lakh. But how can you pay Rs 10 lakh? That's your total income!
If you actually discuss all this with an insurance salesperson, they will tell you that ULIPs also have investment bundled with insurance. While that is true in theory, in practice, any sensible saver should first get adequate life cover. If you do that, you will find that the only insurance product that fits the bill is pure term insurance. Once you have done the insurance part, then you can evaluate a wide variety of investment options in a better way.
Why is that a better way? Because any investment should be evaluated on parameters like liquidity, volatility, safety, transparency, returns and suitability for different time frames. The same saver has different needs for different aspects of savings at different points in time. Sometimes, as circumstances change, you may want to move some money from one kind of investment to another. For example, from a volatile but high returns type to a safe and steady one. At some point, one could have a professional crisis or a job loss and may need to stop investing for a year or two. These are real issues that affect almost everyone at some point. Does a ULIP, a single, inflexible product that bundles insurance and investment into a long-term commitment, serve your purpose? That's a question you must ask yourself.
One question that every saver should be asking is why are ULIPs limited to offering cover worth ten times annual premium. The answer gives you an insight into the anti saver thinking that permeates the Indian insurance industry. The insurance regulator, IRDA, has mandated 10X annual premium as the MINIMUM life cover that ULIPS must provide. However, in the actual products that are offered, the industry only offers this minimum. Why? Because they are actually not interested in the life cover business. The money lies in running the investment business, and so we have an 'insurance' industry that always designs products that only have the bare minimum insurance! Does that make sense? Well, actually, it makes perfect sense for the insurance companies and their agents. Whether it makes sense for you, the saver, is something you have to ponder on!