Video: Here’s why you shouldn’t be investing in ULIPs

The 2018 budget reintroduced the long-term capital gains (LTCG) tax on equities. Direct investing in stocks, mutual funds, portfolio management scheme (PMS) and alternative investment fund (AIF) came under the purview of LTCG. The only exception where long-term tax-free returns on equities were still possible was the humble ULIP or the unit-linked insurance plan offered by insurance companies.

So what followed was aggressive marketing of ULIPs as a tax-free option. But is this tradeoff really worth it?

An Anand Rathi study noted that the first year’s commission paid by some well-known insurance companies was over 10 percent of the total premium collected. In fact, in some cases, it was as high as 18 percent and this commission is deducted from your initial capital investment; Moreover, there are mortality charges, fund management charges, policy administrative charges etc., which account for another 2.5 percent annually. And it doesn’t end there, from second year onwards there is another 3 percent premium allocation charge. So if you have invested Rs 100 in the first year then the actual investment would only be Rs 88-90 and from the second day of the year, it would be Rs 95.