ULIP - Do you Insure or Invest? head-to-head with ELSS

Due to zooming market all equity related investments look more appealing these days. Even insurance industry caught up with this fancy fever in name of ULIP (Unit Linked Insurance Plan). These kind of insurance products attract people with the terms like Investment, stock market boom. When we approach an insurance company should we really look for an investment product? It is agreed that ULIP blends the insurance with investment. But does this blending give advantage to ones insurance/investment thirst? We needs to crunch some fact before deciding whether ULIP is really a genuine mix of insurance and investment.

ADV - ULIP

There are lot of argument between ULIP and ELSS(Equity Linked Savings Scheme) buddies to claim their product is the better one.

ULIP has edge over ELSS if you consider the following reason,

* ULIP adds the insurance flavor to the product nature. {we have to see this is really an advantage :) }
* ULIP schemes offer three or four type of funds varying on risk appetide. Also gives the option of switching between these funds. Not to forget, atleast 2 switching/year attract no switching change.
* Everyone knows ULIP comes with three year lock-in period. But intersting catch is we dont need to wait for another 3 years for the premium paid on second and third year. Full amount can be withdrawn at the end of third year. Whereas in ELSS, each year payments will attract three year lock individually.

Deuce

If you look at the goal achieved, I dont believe ULIP satisfy ones need towards insurance and investment motive. For example if ULIP product offers 10 times the premium amount as sum assured, during unfortunate event one can claim either of sum assured, total unit value (which ever is higher). So when the product reaches maturity and total unit value is higher, one would loss the full amount paid towards the insurance cover. So it is strongly felt that we are losing money at one side which would have claimed if we invested on pure insurance or pure equity product.

** Product like Future plus gives sum assured plus total unit value towards death benefit. But always watch out the charges (discussed below).

ADV - ELSS

Good portion of money paid towards ULIP goes to many different charges. Here is the list of charges popularly available with ULIP,
~ allocation charge
~ Risk cover charge (Insurance + Accident benifit)
~ Policy admin charge
~ Fund management charge
~ switching charge
~ Surender charge (before lock in period)
~ Service tax charge
~ Miscellaneous chare (premium term, mode change)

Albeit all these charges (except insurance specific charges) are available in ELSS also, % of these charges vary drastically between these schemes. If you look at the first year allocation charge, 16 (like future plus) - 35 (like Invest Shield Life) % of premium goes to allocation charge in ULIP whereas 1.5 - 2.5% goes to allocation charge in ELSS. So the worst day of our invested fund in ULIP is the day we get the allocation(imagine 35% lost in value on day 1). Gaining 35% in a balanced, diversified fund (like Invest shield life) is not an easy job. Due to this margin effect, one can see many people are selling ULIP (now almost each family got an insurance agent) and only financial institutes are selling ELSS.

Instead of ULIP, if one try Term insurance policy + ELSS, he/she can get all the benefits except the switching option. To be frank, I am not a great fan of this switch option. REASON - Surely we cannot time the market and by the time we realize market slumps and thinking of switching, we would have lost considerable percent in NAV. so switching to balanced fund type after value reduction may not be a good idea instead of trying to average the NAV.

GAME POINT - ?

I would suggest ULIP to risk-averse people who want to have exposure to equity along with the risk cover. Two things one should keep in mind while putting money in ULIP,
* Allow the fund to work for longer time. Fund charges would have eaten a big chunk of money in the first three years; unfortunately three years is the lock-in period. So technically, after three years only our fund will work towards growth.
* Go for balanced fund from the first premium payment itself. I dont think switching in between after market slump is a wise man decision.

Others, go play ELSS + Term policy. Allow both work towards their respective goals separately.