WHERE YOU LOSE
Three reasons why Ulips work against you.
1
High front-end costs
Distribution costs for a product with 20-30 years tenure are bunched up in the initial years. An early exit would mean losing money. Here's how it works:
Year
You invest Rs1 lakh every year* (Rs)
What you get if you exit (Rs)
Rate of return (%)
1
1,00,000
2
2,00,000
0
0
3
3,00,000
2,72,350
-9.52
4
4,00,000
3,96,887
-0.52
5
5,00,000
5,36,654
3.54
6
6,00,000
6,88,439
5.48
7
7,00,000
8,53,591
6.55
8
8,00,000
10,33,331
7.20
9
9,00,000
12,28,553
7.61
10
10,00,000
14,40,554
7.88
11
11,00,000
16,70,790
8.07
12
12,00,000
19,20,840
8.20
13
13,00,000
21,92,422
8.30
14
14,00,000
24,87,402
8.37
15
15,00,000
28,07,809
8.43
16
16,00,000
31,55,850
8.47
17
17,00,000
35,33,923
8.51
18
18,00,000
39,44,635
8.53
19
19,00,000
43,90,821
8.55
20
20,00,000
48,75,561
8.57
0
0
* This is the cumulative investment at the end of each year. The annual premium is Rs1 lakh. Assumed growth rate of 10%
2
Cost structure encourages hit and run
Because costs are pushed to the front, agents have little incentive to keep your policy alive. Many encourage redemption after the three-year lock-in. The agent gains, you lose. You invest (Rs)
You get (Rs)
1
1,00,000
0
1,00,000
18,000
2
2,00,000
0
2,00,000
5,000
3
3,00,000
2,72,350
27,650
5,000
Year
Redeem
You lose (Rs) Agent gets (Rs)
2,72,350
Having made his money, the agent looks for fresh consumers who will buy new policies and give him the high upfront fees.
3
Cost structure encourages churn
Even more dangerous than an orphan policy is if the agent encourages you to redeem an old policy and buy a new one.
If you do so, that is, redeem the policy after three years, buy a new one at the end of three years and redeem even the second one after another three years, you would stand to lose
Rs55,300 over six years. Your rate of return over six years: -4.76%
Source: Mint research