Why traditional insurance plans will beat ULIPs during the tax-saving season

November 12, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Most ULIPs (unit-linked insurance plans) are far better compared to traditional insurance plans. They are more flexible, more transparent and have the potential to generate bigger returns. But insurance sales do not necessarily follow simple logic. There are a variety of reasons why traditional plans are likely to fare better.

ULIPs are saddled with bad reputation:

A few years back, the older version of ULIPs received a certain amount of bad press, all for legitimate reasons. The product design was terrible, the charges were high, commissions we heavily front-loaded – all of which resulted in customers realising that their ULIPs lost a lot of value when the stock markets crashed. This led to a large number of complaints and companies hurriedly shifted their portfolios to opaque traditional plans.

The new version of ULIPs is far better as charges are now almost comparable to mutual funds and they offer much more flexibility. But it will take some more time before customers come back in large numbers.

Majority of customers are still conservative investors:

Not everyone is a stock market expert. Not everyone wants to realign their investments based on market movements. No matter how financially literate people are, the comfort of low but steady returns is still preferred by many. And yes, the opaqueness of products and their lack of flexibility can be an advantage in certain cases if you want investors to stay put for a long period.

Focus area of insurers:

A majority of life insurance products are still sold by agents and brokers in the offline world. And since life insurance is commission-driven product, agents will push traditional plans because they get more commissions from them. Also, ads rolled out during the tax savings season will mostly be on traditional plans.

My take:

If you are buying insurance only for tax benefits, ensure that your purpose is being met by the policy. Not all single premium plans meet the tax criteria, so don’t blindly buy life insurance. If you can track your investments every quarter, realign your investments and stay invested for a ten-year period. And yes, ULIPs will provide better returns.

For more articles by Deepak Yohannan, visit MyInsuranceClub.com or follow him on Twitter @dyohannan

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/