Why Ulips are useless as insurance products

By Dhirendra KumarIf you take the Ulips route to get yourself adequate insurance, then you could end up using most—or even all—of your income. Of course, I use the word ‘insurance’ to mean what it should—money that your family will get if you die.As a general rule, any earning person should be insured for at least 10 years’ income. However, life cover in Ulips, almost universally, is exactly 10 times the annual premium. Therefore, to get life cover equal to 10 times your annual income, you will have to shell out ALL your income as premium. The maths is unshakeable. No matter what the salespeople say, anyone who has a family should not put even a paisa in Ulips (or any other investment) before they buy 10 times their income worth of life cover policy using pure term insurance. Once you have made your family’s future secure with 10 times your annual income, tackle investment as a separate and different kind of problem.Let me explain the numbers in a little more detail. Let us suppose your post-tax, in-hand income is Rs 10 lakh a year. Then you should have a life cover of at least Rs 1 crore. If you think about what all your family will have to spend on if you die suddenly, then you will find this 10 times amount is barely adequate. Most families will actually need more. If you do not believe me, make an actual multi-year budget. The good news (for you) is that such insurance is quite reasonably priced if you buy it through term insurance products. The bad news (for Ulip salesmen) is that buying a life cover of Rs 1 crore in the form of Ulips will require an annual premium of Rs 10 lakh. But how can you pay Rs 10 lakh? That’s your total income!If you actually discuss all this with an insurance salesperson, they will tell you that Ulips also have investment bundled with insurance. While that is true in theory, in practice, any sensible saver should first get adequate life cover. If you do that, you will find that the only insurance product that fits the bill is pure term insurance. Once you have done the insurance part, then you can evaluate a wide variety of investment options in a better way.Why is that a better way? That is because any investment should be evaluated on parameters like liquidity, volatility, safety, transparency, returns and suitability for different time frames. The same saver has different needs for different kinds of savings and at different points in time. Sometimes, as circumstances change, you may want to move some money from one kind of investment to another. For example, from a volatile but high returns type to a safe and steady one. At some point, one could have a professional crisis or a job loss and may need to stop investing for a year or two. These are real issues that affect almost everyone at some point. Does a Ulip, a single, inflexible product that bundles insurance and investment into a long-term commitment, serve your purpose? That’s a question you must ask.Another question that every saver should be asking is why are Ulips limited to offering cover worth 10 times the annual premium? The answer gives you an insight into the anti-saver thinking that permeates the Indian insurance industry. The insurance regulator, Irdai, has mandated 10 times the annual premium as the minimum life cover that Ulips must provide. However, in the actual products that are offered, the industry only offers this minimum. Why? It is because they are actually not interested in the life cover business.The money lies in running the investment business, and so we have in this country an ‘insurance’ industry that always designs products that only have the bare minimum insurance! Does that make sense? Well, actually, it makes perfect sense for the insurance companies and their agents. Whether it makes sense for you, the saver, is something you have to think about.(The author is CEO, Value Research)

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