Yes, ULIPs have been bad for people in general. I calculated the fee thy charge, whether you gain or lose. It is as much as 7% of the yearly investment at least in the first few years.
Archanji, that's no longer an entirely correct stmt ... yes ULIPs were the worst type of invetment possible pre-2010 days (they were meant purely to maximise profits for the Insurance companies and commission for their Agents).
But not anymore - post Sep, 2010 IIRC, when IRDA stepped in and came out with a hots of regulations - the key ones are as follows:
1) No fooling around with "illustrations" with astronomically-high-perceived-return-rate (which, as expected, almost always was never achieved in real life) - the companies and their agents are now restricted to show illustrations with 4% and 8% return rate only
So, all those subtle playing around with the consumer's latent greed and make him somehow sign the agreement is long gone.
2) No free-for-all fee/charge structures ... there was a time in early 2000s when 27-30% of the premium went to charges or fees. IRDA has since capped charges/fees at 3% for policies whose tenure is less than or equal to 10 years
, whereas, for plans whose tenure exceed 10 years, the total charges can't exceed 2.25%.
This has forced these blood-sucking insurance companies to minimise their internal costs and nowadays it's not uncommon to find products with IRR < 2%.
3) IRDA has also fixed the heads on which various charges and rates
are charged:Premium allocation charge:
A charge deducted before making an investment from your premium. This is the killer-one one needs to be careful with this, as this gets upfront dedcuted from the money that you invest as premium - worse the rates are nomally higher for the initial periods while it reduces later.Mortality charge:
A charge levied for insurance protection provided for death and certain other expenses. This is cost of giving you the insurance cover (along with an investment). Rates are quite good actually with the recent revision of "actuaries" etc.Policy administration charge:
A charge for the expenses other than those covered by premium allocation and fund management charges. A minimal charge, so not a very big issue.Fund management charge:
An expenses for managing your funds - this is important, as it can be as low as 0.75% and go upto 1.35% etc, depending upon the type of inevetment you are deciding for. So if you play the safer and conservative money-market type invetment plan, this will be lower - but for the equity-hevy ones it will tend to be 1.35%.
This is fair enough as the return of invetment is supposedly to be more for equity than the money-market etc.Surrender Charge:
A fee levied on premature cancellation of the policy - this has been made less painful. In case of early surrender, penalty is capped at Rs 6000 for premium above Rs 25,000 per annum and Rs 3, 000 for anything below that.Switching Charge:
A charge levied on switching from one fund to another offered within the product. This has also been minimised.
4) And IRDA fixed the minm Insurance cover and linked it to be a multiple of the premium paid - The minimum sum assured multiple has been increased to 10 times for age at entry below 45 years
(and 7 times for age at entry above 45 years). Plus at no time can the sum assured be less than 105 per cent of total premium paid including top ups. All top ups also must have life insurance cover built into them.
Now coming back to the perennial and never-ending debate between which is better ULIP or a combo of Sound investment + Term Plan.
Well I belong to the old school which firmly belives teh later being a better bet - but a bit of perspective is also important.
IMO, when tying to some important "milestone" expenses (e.g. Child Education, Daughter's Marriages etc), there's sufficient pull for the ULIPs for a lay-man (like moi).
And most of it's psychological I guess ... it's that somewhat-contended-feeling of looking at a piece-of-paper (policy document) and thinking of "having done something", that trumps the "virtual" world of FDs, MFs, CDs etc etc.
Plus if you are a bit saavy investor, the plethora of investment options that are available within an ULIP is mind-boggling ... today a good ULIP will provide you with options of spreading your investment exclusively into Bluechips or Midcaps or even a distributed one
. It will also allow you to fix the amount of your invetment into "safe" ones (like debt) while giving moderate growth on your investment via the Equity route. There are evenn Dynamic P/E funds which will switch your invested money amongst Equity depending upon which aspect of the Stock Market is doing better etc etc etc.
If you indulge into MFs, you will notice these options (and also the underlying stocks) are more or less similar to what a good distributed MF portfolio looks like
But the most important thing that favours ULIPs is the IT rule of 10(10)D
- which exempts the return of invetment as there's been a LI component attached to it. Had the same amount of money is invested into MF youa re liablle for long-term-capital gain tax while for FD the actual-IT-rate will become applicable. I tend to look at these various charges that you pay for an ULIP as an round-about and crude way of saving you from paying up these various taxes.
So frankly, ULIPS are no longer such a bad investment decision, as it used to be.
But one needs to be extremely careful while going for ULIPs and consider the actual need, tenure, alternate Insurance cover availability etc etc.
Just my 2 cents ...