5 Reasons why ULIPs are BAD

ULIP is unit link insurance plan, which provide insurance as well as capital appreciation of the premium paid. ULIP provides the combination of two products in the premium of one. So what are the problems with ULIPS? 

1. Un-sufficient Insurance 

Before purchasing insurance plan we should know how much cover we required. ULIP provides very less life cover with high premium. For most of the ULIPs premium paid is tax exempted under section 80(c) subject to premium is not more than 10% of sum assured hence most of ULIPs life cover is 10 times of premium paid. Suppose I want 20L life cover then I have to purchase a ULIP with the premium of 2L. Is this cover is justified with this premium? 

2. Insurance and investment are just opposite to each other 

The purpose of insurance in providing the security and the purpose of investment is capital appreciation. Investment involves some kind of risk be it is low or high. So both contradict with each other, hence neither ULIP is able to provide the enough security nor will it be able to high risk for generating good returns.   

3. High charges 

ULIPs are the higher side of charges. There are n number of charges involves which get recovered from the premium paid. These charges are :- 

 Premium Allocation Charge: - These charges deducted upfront from the premium every year.
 Below are the premium allocation charges of LIC FLEXI PLUS

Premium	Allocation Charge
1st  Year	7.50%
2nd  to 5th  Year	5.00%
Thereafter	3.00%

Below is the premium allocation charges of SBILife Smart_Wealth_Builder

Premium	Allocation Charge
1st  Year	9%
2nd  to 3rd  Year	6.50%
4th to 5th Year	6.00%
6th to 7th year	3.5%
8th to 10th year	3.0%
Thereafter	0%

     

Mortality charges: - Cost of life cover as per definition. It depends on age and increases as your age increases. Generally 1.4 INR to 6.3 INR per annum per 1000 INR sum at risk.

Policy Administration charge:- This gets deducted on monthly basis by cancelling appropriate number of units out of the holder’s fund value. This varies from 30 INR to 50 INR per month.

Fund management charge:- Charge payable for managing the assets. It starts from 0.5% and varies depending on the fund allocation. So overall total charge for 1^st year will be around 10% or more. It decreases every year but still it is on higher side.  

4. Cost of switching from one ULIP to another:- 

Suppose you want to switch from one ULIP to another ULIP then you have to first surrender your first ULIP and purchase the new ULIP. Remember you have to again pay the high charges at the initial years of new policy. This makes switching from one ULIP to another ULIP is costly. 

5. Liquidity:- 

Liquidity is also one issue. Most of the ULIPs come with 3 to 5 years lock-in period. If you surrender your ULIP within lock-in period penalty varies from 3% to 15% or more.

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