- The aim of life insurance products is not profit generation but protection. You have to be clear how much is your need for protection and how much is your need for investment returns.
- Primarily your profile configuration is more important. many people, do not configure what they are looking for and based on the agents words will subscribe to a product. Though no company sells bad products, a wrong selection has always opportunity cost. By opportunity cost what I mean is that, when you choose to put your hard earned money in a wrong investment avenue say A, which gives you a return of 5%. By investing in avenue A, you have chosen not to invest in other avenues. If avenue B gives a retun of 10%, then you incur an opportunity cost of 5%.
- You are directly exposed to the vagaries of the domestic as well as international markets. At this point, Indian economy is not fully integrated with the global markets at the same time not isolated also. Due to this the stock market returns are more volatile than before. By investing in stocks your ULIPs also expose you to the volatality.
- If you are investing for your pension purpose, then think twice before choosing the product. Most of the companies provide you the choice of level of risk you would like to take. In general you will find, risk, income, secured, balanced fund options.
- Secured funds are mostly invested in government bond market and this is by far the most secured avenue. Where there is less risk, less return is the maxim. In India, the bond market is not a matured market still and is mostly limited to the institutional investors. Direct involvement of the public is not much.
- Income funds aim at a moderately higher return which is stable. The invesment avenues are mostly Fixed income securities and government bonds and some equity. Fixed income securities can be corporate bonds and other bonds issued by financial institutions.
- balanced funds balance between equity and bonds. The percentage varies from company to comapny.
- By Risk option, 80-100% investment is done in equity where the return is highest and equally risk is also high.
your agent may say.......
In the 4 years of its existence many ULIP products such as LIC's Bima plus, Future plus, and other company products have given even 30-40% during some point of time or the other. your agent may project that this is the constant return you are going to get on your investment. When you compare a traditional insurance product which gives you a maximum of 8% including your tax benefit with the 30-40% return on ULIPs, naturally there is no second thought for you.
but... please keep in mind that... these returns cannot be guranteed. In the long run over the life of your policy say 10 years or 20 years, the returns get averaged out and you may not be getting the socalled 30% or even 60% as some comapny agents canvas.
as a remedy to this, some companies started cavanssing, pay only for 3 years period. It looks very simple... invest 10000 for 3 years and at a rate of 33% at the end of 3 years you will have another 10000 which can become your 4th year premium and so on. Keep in mind, this is designed based on one year return in the high days of stock market. In the dynamic market, this is like a water in the fist.
some other canvanssing .... is that exist at the end of 3 years. Do you know why this 3 years period? For any insurance company the biggest problem is the business acquisiton costs. The first year commission paid to the agent at times ranges upto 40-60% of the premium. Insurance companies spread the acquisition costs in to first 3 years and that is why its mandated be it tradtional or ULIPs that the customer has to make premium payment atleast for first 3 years.
