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.

If you look at the 10-year performance of the top-10 ULIP schemes, you will get an average return of 14-15 percent which compares with over 20 percent for multicap funds. So effectively if you had invested Rs 25 lakh every year for the last 10 years into a ULIP you would have got a maturity value Rs 6.21 crore and a life cover of Rs 2.5 crore.

If you went and bought a term plan of Rs 2.5 crore, you would be spending only Rs 31,000 a year and the balance Rs 24.69 lakh could be invested into pure mutual funds, then you would receive a return of about Rs 9 crore odd over the last 10 years and even assuming LTCG you would have still pocketed over Rs 8.5 crore as your net return.

So doesn’t Rs 8.5 crore look significantly better than Rs 6.2 crore that the ULIP got you?