Hello All, There are frequent posts about ULIPs. I have personal experience with ULIPs and thought I will document it here.
My ULIP is with ICICI Prudential for a sum assured of 10L and yearly premium of 1L for 7 years. 5 years of premium payment is mandatory.
I have paid 5L premium so far, and my account balance is 6,13,000. So, My investment of 1L per year grew at 7% to reach this amount in 5 years.
If you look at ICICI Prudential life focus 50 fund NAV, it has an impressive 60% cumulative return (17% annual returns) since Nov 2020. Now, my real returns are 7% but the NAV has returned 17% on average. How can this be? The answer lies below.
I pay 1L per year, from which about Rs.12,000 is taken by ICICI Prudential as upfront fees and charges (They will take 12k/year for the whole 10 years). Remaining 88,000 is invested in the focus 50 fund. Right away, I lose 12% of my investment to fees. Just to make money the market needs to be on a heavy bull run
Had I invested 1L per year in a nifty 50 fund, say UTI nifty 50 index ETF with a return of 12% every year, I would have a balance of 7,12,000. Clearly, I have lost opportunity to earn 1,00,000 more by choosing ULIP instead of ETF/MF.
The next scummy part of the ULIPs is the insurance part; The fund has highest payout risk in the first year, and least risk in the 7th year. This is how it is skewed towards the insurer.
when one pays the first year premium of say 1L and dies that year, the company pays out the full benefit 10L, which includes 1L of premium. In effect the company only pays 9L from its pocket.
second year the real payout from the company's pocket is 8L (10L minus 2L premium paid and gains from the market) and so on. The more premium you pay, the less the company has to pay from their pocket.
The real insult to this injury is the term insurance premium you would have paid for the same coverage is about Rs. 55,000 for thw whole 10 years. So, you are paying twice as much in ULIP for same coverage (Rs.12k times 10 year = 120,000) for the coverage plus the investment decisions they make.
Tax aspect:
ULIPs are tax free, you get deduction for the investment under 80C and the returns are tax free. However, you can get the same kind of benefits for initial investments from ELSS etc. returns are also tax free upto 1L from ELSS. So, one would have got 12% annual returns for 5 years for the same investments if invested in ELSS instead of ULIP giving 7% real returns.
TL,DR;
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Real life story on how ULIP returned less, comapred to the "NAV" that the ULIP companies publish online.
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Hidden fees severely reduce real returns
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Term insurance + ELSS is much better than ULIPs
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ULIPS are money making machines for the companies and not for the individual
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Only case where ULIP makes sense is for people who leave money in their bank accounts and do nothing with it