I have a substantial investment in UTI's ULIP '71 scheme. I now find that there are many combined investment plus insurance avenues available. Are these worthwhile investments?
—R.P. Shah
While ULIP's past is inextricably linked with UTI's assured returns history, our views on mixing insurance with investment is very clear: DON'T. Despite some superficial similarities which insurance companies leverage in their marketing campaigns, insurance and investments are two very different financial products. Investing can and should be completely transparent and numbers driven. It should always be crystal clear to you what kind of returns your investments are fetching you.
In most mixed products, the investor has no idea about what part of the money he is paying goes towards insurance and what part goes towards insurance premia. As a result, he is neither able to determine whether he is getting insured at a reasonable price nor is he able to figure out what the return on his investments is.
Another problem is that some characteristics of insurance 'leak' into his investments. For example, it is desirable for insurance to be a long-term contract. However, it is most undesirable for investments to be locked in for a long period (or for any period at all). In mixed insurance-investment products, the investment part is also locked in for the period of the insurance coverage. Because of this, you lose one of the most important qualities of a good investment—liquidity. It is true that there are some legitimate investment avenues that are not liquid (PPF, for example), but then, those offer some other desirable characteristic like a government guarantee that make them desirable. Mixed insurance-investment products that are currently being offered have no such qualities.
Moreover, insurance agents get a very hefty percentage (around 25 per cent in some cases) of your premia as commission which is typically several times what a mutual fund distributor gets as commission. In our opinion it is a serious impropriety for any product that is even partially an investment to be sold at such commissions.
Therefore, it is best that you treat investments as investments and insurance as insurance and do not mix the two. For insurance, decide on an amount that you would like to insure yourself for and carefully choose a term insurance policy of the longest possible period. And for investments, read this magazine regularly and choose a good set of mutual funds that suit your needs.
This article was originally published on December 23, 2004.
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