Investment in ULIPs should be for a period of 10 years (minimum) or more, since it is a long term investment product and not an option for insurance cover.
Investors seeking insurance often end up investing in ULIPs, not realizing that ULIPs are market-linked and focus more on returns than on providing sufficient insurance cover.
ULIPs are investment products with very heavy costs (entry loads) in the initial 3 years, the highest being in Year 1. Broadly speaking, it can range from 10% to as high as 60% in Year 1. In short, if you are paying a premium of Rs 1 lakh annually, only Rs 40,000 is invested. Rs 60,000 is a sunk cost. So before investing in any ULIP, always check on the initial costs. The costs in the next two years are additional.
I have come across a number of people who buy ‘insurance’ in the form of ULIPs which are of 3-5 years of duration. There are three vital mismatches here:
- ULIPs are primarily investment products with little focus on the quantum of insurance
- In order to get good returns on short-term ULIPs (of 3-5 years maturity), one has to be very lucky, since the costs are prohibitive in the first 3 years, especially.
- If you pay the premium for the first 3 years only (when the costs are at their peak), then you tend to lose out. In the later years larger sums of your premium get invested (since costs are lower), so the chances of getting much better returns is more in the long run (10-20 years).
If the investor has a horizon of 3-5 years only, ULIPs are not ideal products to invest in. ULIPs are good products provided your time horizon is 10 years or more and you purchase it as another asset class of investment and not as insurance.
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