ICICI PRU SIGNATURE Pros & Cons

Branch manager expects me to invest me into this plan to make some money for himself XD

If you want market related investment, go for mutual funds.

If you want life insurance instrument, go for term plan.

If you want both, get both of them separately.

If you want to make your BM/RM rich, get a ULIP like he suggested.

ULIPS are the worst form of investment. Don’t ever purchase ULIPS. There are lot of admin charges involved and GST. This is a investment cum insurance, hence gst will be levied.

@saymyname78 For insurance, get a term plan. For investment, Invest in Index funds(no need to track regularly) and live your life peacefully. Never ever thing about these kinds of plans where they claim you will get 15 or 20% returns.

What is BAD about Ulips?

INSURANCE Part:

Firstly, Insurance is an expense and by combining it with a savings/investment option, the purpose of the entire instrument becomes kind of tug of war between two different aims. The primary way should be to check the eligibility and requirement of the life insurance for the person which includes:

(I) Whether life insurance is required or not? If there are no financially dependent persons, life insurance is not required.

(II) If it is required, how much is the requirement? 

The 10-30/40 times premium Sum Assured FOCUSES on the amount of premium which you can pay rather than the primary aim of The Total Sum Assured (Life cover amount). Eg. For a 30 year old male, the online plans give a sum assured of approx. 1000 times yearly premium. For offline the corresponding value is anywhere between 500-700. At higher age groups and with large term periods, there is corresponding lowering of the sum assured.

In short, the insurance component of a Ulip is 99% of times inadequate as a sole policy.

Secondly, the mortality charge table used in Ulips is higher as compared to mortality charge table for the same company in its own non-ulip term (offline / online) policies. In general, the inadequate insurance cover is expensive too.

INVESTMENT Part:

Part 1: CHARGES

1. The Premium Allocation Charge is a front-loading charge, which means the charge is levied first and then the rest of the money is put for investment. Compare this with ongoing charges like Fund Management Charges or Back-loading (eg Exit loads in which the charge is levied at the time of withdrawal). In older times, when there was an Entry Load on the General Mutual Funds, which now is not present. This charge as mentioned is basically a commission charge for the agent and/or company, and does not help the investment in any manner.
2. Policy Admin Charge- completely useless charge. Everything can be seen online and this charge is waste of money. Over that, this charge usually increases year on year.
3. Surrender / Discontinuance Charges. This is the back-end load and decreases the liquidity of the money.

Part 2: FUND MANAGEMENT

In older times, the insurance companies used to delegate the responsibility of fund management to the regular mutual fund companies and did not require a separate fund management team. Now they are required to do so. In most companies, the size of the investment team is small (sometimes even 1 or 2 main persons managing the various funds). The quality of fund management in insurance companies is thus lower than that of the regular MF companies. The 1.35 -1.5% FMC (adding service tax of 12.36% means this gets translated to 1.5-1.7% net) of most equity funds in the various Ulips is comparable with the charges in the Direct Plans of the regular equity mutual funds. Similar is the case with the debt mutual funds. If you will look in more detail, then presently the FMC of equity and longer debt Ulip funds is in general slightly lower than corresponding regular funds, while those of liquid/shorter term debt ulip funds is slightly higher.

As far as I know, simple index funds are not available in any of the Ulips (I have checked the insurance fund section of Morningstar.in and have not found any index fund). For some people, this is a very decent option with minimum charges (but then, Ulips are not cost-effective at all).

Part 3: The Various OPTIONS-

Switching Options:

This is touted as a major benefit of Ulips. The ability to move money from equity to debt at market tops, and then move money from debt to equity at market bottoms is extremely beneficial. The only problem with that is no one has been able to do that consistently ever (at least that is what all the major gurus say in the world all these years). Moreover, market tops and bottoms are only apparent in the hindsight and not when they are occuring. So, if all the smart people have never been able to do that consistently, how can that be expected from a relatively unknowledgeable / less knowledgeable person buying a Ulip. It may be helpful for a very select few, but not for the 99.9% people. Also, behavioral finance tells us that if given an option like that, most people would do it in reverse, that is put money into equities near tops and put money into debt near bottoms. This is even worse than not doing anything at all.

Part 4: ILLIQUIDITY and LOCK-IN

If the management team of a regular mutual fund is not performing to your satisfaction, you can remove your money from them and put that amount into a different company. OR you can remove your money within the fund company. In Ulips, neither you can change the fund management company nor you can transfer away from funds available in your particular Ulip to another fund within the same company.

The surrender / discontinuance charges are extremely high. Compare this with 1-3% exit loads in various regular mutual funds.

The Illiquidity costs in a Ulip are very high WITHOUT providing a corresponding degree of benefit.

MAJOR CONS:

1. Too many charges. = Expensive and Complex.
2. Not-so-great management teams as compared to regular Fund Companies. = Suboptimal Management with comparable management expenses.
3. Very Illiquid, without providing any corresponding benefit for that illiquidity.
4. Insurance Benefit is too low for use and expensive as compared to a comparable term insurance.
5. Complex Options which in general are worse.

What is GOOD about Ulips (=Pros)?

Ulip is probably the perfect option for those people who get utterly confused and get policy-paralysis or decision paralysis (No, this is not an uncommon thing. More and more options, after all there are thousands of mutual funds in India, just create a severe type of confusion and to prevent selection of a bad or suboptimal option, one just does not choose any).

The advantages of Ulips are:

1. They give you an equity based tax-free option in the 80C category. The other pure equity based option is ELSS (Equity Linked Savings Scheme). While private pension plans (like Templeton India Pension Plan and UTI Retirement Benefit Pension Plan) are hybrid debt oriented mutual funds with decent options) are also there. In case, ELSS get dropped in DTC, then these will remain as the only pure equity based plans (of course, one can choose an 80% or 50% equity option too).
2. Although, the insurance component is inadequate in these, but as an asset allocation instrument (and NOT as a market timing instrument), this provides free transfer from equity to debt or vice versa. Free both in the sense of a number of switches every year as well as no payment is required in terms of capital gains tax as would happen if this is done outside between mutual funds or direct stocks, debt instruments, gold and cash.
3. The trigger portfolio option and automatic life-cycle based asset allocation are decent options for people who do not have the know-how or emotional execution capability.
4. The loyalty addition is a small bonus if the requirements are fulfilled diligently.

ULIP always results in loss to the investor and major profits to the Insurance Co and the agent.

So if you are into doing social service, definitely invest.

If you are not sure about mutual funds or find them risky, or if you want to opt for ULIP mainly for tax benefits, instead of ULIP, take a separate pure term plan and invest the balance in NPS Tier I. You will get better tax benefits and much higher returns. 

Said NO to the branch manager , he was bit disappointed .

Thanks to all dimers friends for helpful suggestion and proper  guidance . 

Thanks a LOT .