Life Insurers ULIP Index Funds – Why you must NOT invest?

Due to the popularity of Index Funds or Mutual Funds, insurance companies are launching ULIP Index Funds. Why you must NOT invest? What is the catch here?

ULIP Index Funds

These insurance firms mainly focus on small-cap and mid-cap sectors, driven by the outstanding recent performance in both market segments.

Max Life recently introduced the Midcap Momentum Index Fund, Max Life Nifty Smallcap Quality Index Fund, and now PNB MetLife has taken it a step further with the launch of PNB MetLife Small Cap Fund (ACTIVE FUND). The names of these funds may lead new investors to mistakenly believe they are investing in Index Funds or Mutual Funds, but in reality, all of them are ULIPs.

Life Insurance companies usually introduce ULIP plans rather than mutual funds for their product offerings. As a result, when you decide to invest in these products, you indirectly cover the cost of life insurance coverage and ULIP expenses. These plans come with ULIP features, but not the features typically associated with mutual funds.

Life Insurers ULIP Index Funds – Why you must NOT invest?

Let me now share with you the reasons for outrightly saying that you must stay away from such products.

# They are ULIP products, not open-ended Mutual Funds

Be cautious when investing in ULIP products that have names similar to Mutual Funds. It is important to remember that life insurance companies are not permitted to offer mutual funds. However, due to the rising popularity of index funds and mutual funds, especially during a bullish market, it is common for people to mistake these insurance products for mutual funds or index funds.

ULIPs, also known as Unit Linked Insurance Plans, offer a unique blend of insurance and investment opportunities. These products come with a lock-in feature that requires a minimum commitment of 5 years. On the other hand, mutual funds, whether active or passive, solely focus on investments and do not have any lock-in period.

# ULIPs have higher costs compared to DIRECT Mutual Funds

Life insurers can charge a fund management fee of up to 1.35% per annum for ULIP funds, as regulated by IRDA. They also have the option to charge a lower fee, but they usually prefer to stay near the maximum limit. In contrast, direct mutual funds typically have lower expense ratios than ULIP funds.

If you go one step further and check the cost of DIRECT PASSIVE FUNDS to ULIP fund management charges, then obviously you notice that mutual funds are far superior in cost. Whenever you invest in any product, the first thing you have to check is the COST. Sadly many ignore this and just concentrate on the past returns.

Along with fund management charges, insurance companies may charge you premium allocation charges, or policy admin charges.

Hence, you have to be cautious while investing in ULIPs and compare the same with mutual funds. In all cases, mutual funds are far superior to the ULIP plan’s cost.

# Lock-In Features Of ULIPs

With ULIPs, your funds are tied up for a 5-year period, whereas mutual funds allow you the flexibility to withdraw whenever you choose. Whether the fund is doing well or poorly, you need to stay invested in ULIP for at least five years. This is one of the biggest hindrances of ULIPs. Even though the option is available to switch your money from one ULIP fund to another (but within the same company and within those who are managing your money).

However, if you withdraw the money after 5 years, then if move to the new insurer, then again a new journey of 5 years lock-in will continue.

# Surity of underperformance

How I am sure that even in such Index Funds the performance can’t match the index returns? The reason is COST. Due to high cost, and restriction to match the Index, these funds may obliviously underform the Index. An index must not outperform. But they have to match the index return (subject to a small tracking error). However, considering the tracking error and the high costs involved, these funds might significantly underperform the index in the future.

Conclusion – Just because the name includes FUNDS or INDEX FUNDS from Life Insurers, it doesn’t necessarily mean they are Index Funds or Mutual Funds. These are actually ULIPs labeled as Index Funds. So, be cautious before investing. Consider factors like cost, lock-in period, and your strategy for dealing with fund underperformance. Make an informed decision based on these considerations.

4 Responses

  1. Sir,
    You have explained about the cons of ULIP.
    What exactly is an ULIP, what do they do.. this is missing. Could you please elaborate on this.

    Thanks

    1. Dear Kishore,
      ULIP stands for Unit Linked Insurance Plans where the risk is beared by investors. They are the mix of insurance and invstment products. I can’t explain the whole ULIP feature in the single post. Hence, stayed away. However, if you wish to explore, then you can check IRDA website and you can read more about this. After that, let me know if you have any questions or doubts in undertanding about ULIPs.

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