A few days ago, an investor complained that he was taken for a ride by his insurance company. His grouse was that he had lost more than 50 percent of his premium money in a matter of a few weeks though the agent had assured him that his premium would earn annual returns of over 30 percent.
With the stock market refusing to reverse its bearish mood, it's not just the equity market investors who are scanning the stock pages. Even insurance policyholders are keeping a close watch on the Sensex, and for some, it hasn't been a pretty scene. The growing interest of insurance policyholders in the equity market has a lot to do with unit-linked insurance plans (ULIP).
In the last 12-18 months, insurance companies have been aggressively pushing ULIPs and in fact, other insurance products such as endowment plans and whole life plans have taken a back seat. What aided the popularity of ULIP was the bullish stock market condition which also helped investors earn good returns besides life cover. If the bearish market conditions persist for some more time, ULIPs probably will be put to test.
While there is nothing wrong with ULIPs in general, you can find plenty of faults with the way this product is being pushed. For one, insurance advisors have been aggressively pushing this product promising handsome returns. Invariably, investors don't know much about the various expenses involved with the product.
Not for short term
Very few are aware that insurance companies collect a huge percentage of management expenses from the first year's premium amount. While there is no fixed percentage for it, it varies from 50 to as high 65 percent in certain cases. For instance, if an investor signs up for a ULIP for a first year premium of Rs 50,000, as much as Rs 25,000-35,000 will be deducted as management expenses. After taking into account the premium allocation for life cover, the investor's contribution towards his investment corpus will be very low.
However, investors should remember that the high cost of management expenses is restricted to the first year of premium and this comes down drastically in the coming years. As a result, if you are looking at building a corpus through ULIP, you should think long term.
Though ULIP offers the flexibility of discontinuing or lowering the premium in subsequent years, an investor would be better off thinking long-term as management expenses come down drastically over a longer period of time. In fact, the management expenses are even lower than mutual funds when the policy gets older.
Think long
Though the current stock market trend is bound to make one worry, ULIP holders should pay little attention to NAV (net asset value) of their investments as ULIPs prove better over a longer period of time. Even when one signs up for a ULIP, insurance cover should be the primary focus and returns from investments should be secondary.
For those who can't handle the vagaries of the equity market, a switch to a debt product strategy could be considered though it is not advisable if you are a long-term investor. When you opt for a switch to debt, you have to exercise the option of switching to equity at the right time.
There are very few who have managed to time the market right and history has also shown that passive investment strategy too pays when you think long. More importantly, do not alter your annual premium simply because equity markets have turned negative in recent times. As pointed out earlier, management expenses come down drastically from the second year onwards in the case of ULIPs.
With the stock market refusing to reverse its bearish mood, it's not just the equity market investors who are scanning the stock pages. Even insurance policyholders are keeping a close watch on the Sensex, and for some, it hasn't been a pretty scene. The growing interest of insurance policyholders in the equity market has a lot to do with unit-linked insurance plans (ULIP).
In the last 12-18 months, insurance companies have been aggressively pushing ULIPs and in fact, other insurance products such as endowment plans and whole life plans have taken a back seat. What aided the popularity of ULIP was the bullish stock market condition which also helped investors earn good returns besides life cover. If the bearish market conditions persist for some more time, ULIPs probably will be put to test.
While there is nothing wrong with ULIPs in general, you can find plenty of faults with the way this product is being pushed. For one, insurance advisors have been aggressively pushing this product promising handsome returns. Invariably, investors don't know much about the various expenses involved with the product.
Not for short term
Very few are aware that insurance companies collect a huge percentage of management expenses from the first year's premium amount. While there is no fixed percentage for it, it varies from 50 to as high 65 percent in certain cases. For instance, if an investor signs up for a ULIP for a first year premium of Rs 50,000, as much as Rs 25,000-35,000 will be deducted as management expenses. After taking into account the premium allocation for life cover, the investor's contribution towards his investment corpus will be very low.
However, investors should remember that the high cost of management expenses is restricted to the first year of premium and this comes down drastically in the coming years. As a result, if you are looking at building a corpus through ULIP, you should think long term.
Though ULIP offers the flexibility of discontinuing or lowering the premium in subsequent years, an investor would be better off thinking long-term as management expenses come down drastically over a longer period of time. In fact, the management expenses are even lower than mutual funds when the policy gets older.
Think long
Though the current stock market trend is bound to make one worry, ULIP holders should pay little attention to NAV (net asset value) of their investments as ULIPs prove better over a longer period of time. Even when one signs up for a ULIP, insurance cover should be the primary focus and returns from investments should be secondary.
For those who can't handle the vagaries of the equity market, a switch to a debt product strategy could be considered though it is not advisable if you are a long-term investor. When you opt for a switch to debt, you have to exercise the option of switching to equity at the right time.
There are very few who have managed to time the market right and history has also shown that passive investment strategy too pays when you think long. More importantly, do not alter your annual premium simply because equity markets have turned negative in recent times. As pointed out earlier, management expenses come down drastically from the second year onwards in the case of ULIPs.
