One of the common strategies used by insurance agents while trying to sell a unit linked insurance plan(ULIP) is to draw a comparison between the ULIP and mutual funds and show that the ULIP would provide superior returns to mutual funds over the long term and plus an insurance cover.
Comparing a ULIP with a mutual fund would be like comparing apples and oranges as they have different investment objectives, product features, investment structure, expense structures and fund management methods.
Investment objective – Contrary to what your agent would like you to believe, a ULIP is not an investment product with an insurance cover but an insurance policy which along with providing a life cover also invests a part of your regular premium for the long term. Hence a ULIP is a risk management product with a savings component while a mutual fund is a pure investment product.
Investment structure – A ULIP has two components – life cover + savings fund. A part of the regular premium goes towards mortality charges for the life insurance and the balance net of other charges is invested. In a mutual fund, the entire amount net of the charges is invested in the chosen fund.
Product features – In addition to the life insurance cover, a ULIP offers several additional features or riders like accident benefit, disability benefit, critical illness etc. The regular premium paid up to a max. of Rs. 1,00,000/- is eligible for tax rebate under section 80 C. A mutual fund is a plain vanilla product without any such features and only the ELSS plans with a lock-in of 3 years offer Sec. 80 C rebate.
Expense structure – Apart from the mortality charges for the life cover, ULIPs have huge charges – (premium allocation, policy admin ,fund management) for the first few years and this eats into the returns. Closing the policy before the stipulated time also attracts surrender charges. The optional riders are charged extra. Mutual funds have significantly lower expenses and most of them have no entry loads or exit loads.
Fund Management – The mutual funds in India are regulated by SEBI – Securities and Exchange Board of India and have to follow the strict disclosure (publishing of NAVs, declaration of dividends, details of investments) and adherence norms. ULIPs come under the purview of IRDA – Insurance regulatory Development Authority and are relatively less transparent and portfolio disclosure is not mandatory.
Summarizing the above, one should consider opting for a ULIP only if they want an additional insurance cover also along with the long term savings part. Pure investment products should be looked at for investment purposes. People looking for a huge life cover should take a pure term cover.