(This article was first published on DNA Money.)
With the March 31 deadline looming to file income tax returns, many people look to make last-minute tax-saving investments in haste. Which means, it is this time of the year when Unit Linked Insurance Plans (popularly known as ULIPs) are typically pushed by insurance agents. People looking to save the last thousands usually tend to fall pretty to marketing pitches that promise the best of everything.
ULIPs are, as the name suggests, unit linked insurance plans that are touted as the perfect mix of insurance and investment. However, they are far from the ideal financial products they are made out to be. In reality, ULIPs are complex and expensive. They promise both insurance and investment but in reality, fail to provide the best of either of the two. Insurance and investments are two very different things, serving two very different purposes. They are like, you can say, chalk and cheese, and shouldn’t be mixed.
The purpose of insurance
Insurance is an expense you pay to guard yourself and your family against emergencies. Insurance of any kind, promises a reimbursement at the time of a loss. In case of life insurance, which is a component of ULIPs, the reimbursement comes at the time of the policy holder’s untimely demise. This should be the sole purpose of life insurance — to help your dependents come out of their loss without having to face a financial crisis too. Life insurance should not be seen as a means to generate returns.
The purpose of investment
Investment is what should be looked upon from the angle of generating returns. While insurance is an expense, investment is a strategic bet you place to allow your money to grow. You invest for building a corpus for specific goals and objectives, which could range from long-term goals like your retirement or a child’s wedding to short-term goals like the down payment of a house or a vacation to foreign shores. The type of investment you make would depend on the type of goal you have. An investment can also be changed or replaced if it isn’t working out well enough.
This is how insurance and investment differ from each other, and as do the reasons to have them.
ULIPs promise a mix of both, and therein lies its basic fault. The best kind of life insurance is term insurance, which is cheap.
The best kind of investment depends on your time horizon and goal, and should be understandable.
ULIPs are expensive and not transparent. Here, how much of your money goes towards management expenses, towards insurance and how much is invested where, is not clear at all. Why would you want a product that does not clearly tell you what it does with your money?
It is better to avoid an investment instrument than getting into it without understanding the product details. Especially when you need to make a rushed tax-saving investment decision and don’t have much time to take an informed decision.
So, when an insurance agent tries to sell you a ULIP before 31 March, just tell him to come back later when you have more time. Right now, to fulfil your tax-saving obligations under Section 80C, simply invest in ELSS funds, PPF or tax-saving FDs.