scorecardresearchWhy one should not invest in ULIPs

Why one should not invest in ULIPs

Updated: 13 Dec 2022, 10:53 AM IST

  • ULIPs are frequently promoted as a 'hybrid-investment' option, but come with numerous drawbacks such as high upfront charges, limited control, liquidity restrictions and risk of market volatility. These factors should be considered when deciding whether to invest in ULIPs or not.

ULIPs are seen as market-linked securities first, and an insurance product later

ULIPs are seen as market-linked securities first, and an insurance product later

When it comes to investment, ULIPs (Unit Linked Insurance Plans) are frequently recommended. ULIPs are marketed as the ultimate in ‘hybrid-investment’ options, offering both life insurance coverage and a long-term savings option.

Despite of the benefits associated with ULIPs, there are certain drawbacks that make some people wary about investing in them.

The first disadvantage associated with ULIPs is the high costs associated with these plans. ULIPs come with significant upfront charges for setting up an account, higher premium rates than other types of insurance, and fund management fees. These combined expenses take away a large chunk of your potential returns, making this type of investment highly unprofitable.

Furthermore, regulatory bodies set regulations on ULIPs which limit the fund investments offered by the insurers. This makes ULIPs a less flexible option when compared to other types of investments like mutual funds or stocks. Investors are unable to plan their own portfolio according to their risk appetite or personal goals, thus reducing their overall returns.

Another issue is the lack of liquidity. With many ULIPs, surrendering or canceling the policy has stiff penalties. You may be unable to access cash or use your policy assets when needed unless you stick to the terms offered by the insurer. In addition, ULIPs also have different terms for surrendering mid-term. These rules differ from insurer to insurer and therefore cannot give you a guaranteed exit when you need your money. Even if you are able to cancel your policy, you may find that there are significant charges to be paid which could limit your returns.

Finally, ULIPs carry the risk of market volatility. These are longer term investments and follow the movements of their underlying index or equity markets. This means that you will likely see fluctuations in your returns. While the value of your account can go up over time, the truth is that it could also decrease. There is no guarantee that you will be left with healthy returns after the investment period.

In conclusion,ULIPs are not the best investment option for everyone. Due to the combination of high charges, limited control and liquidity restrictions as well as the inherent risks associated to the current market volatility, individuals should think carefully before investing in ULIPs. With careful research and due diligence, investors will be able to find an appropriate financial product suited to their needs.


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First Published: 13 Dec 2022, 10:53 AM IST