Though agents promote Ulips instead of term policies, the latter make more sense for pure insurance purposes.
Sanjay Khatri, a young telecom professional, was recently purchasing a life insurance policy.
While scouting for the right product through different agents, he found that a large number of agents were very gung-ho about Unit Linked Insurance Plans (Ulips).
"The returns are very good and you get both investment and insurance on a single policy," he was told. On cross checking with his friends, he found that some of them had also bought similar policies.
With his mind made up, he approached his financial planner to scout for a Ulip that matched his age profile. But to his surprise, the planner shot down the basic idea to buy a Ulip.
The advice was clear: "No point in buying a policy that is way too expensive and does not provide adequate cover."
When he sought an explanation, here's what he got: Ulips typically charge you a large number of fees. This starts with premium allocation charge, followed by policy administration charge, fund management charge... the list goes on.
Especially, in the first year, there is a deduction of about over 40 per cent from your premium.
In the next two years, these amounts come down but it is still as high as 20 per cent. Only in the fourth year onwards, it settles at 4 per cent per annum. Compare this with a pure term policy and the numbers are dramatically different -- a mere 7 per cent in the first year.
