ULIPs or Unit Linked Insurance Plans have been one of the most controversial insurance options out there. 

A lot of comparisons between ULIPs and mutual funds have already been made in the past.

However, this article is different because it addresses a major problem being faced by retail investors – misguided advertising.

Recently, a lot of companies have been selling ULIPs disguised as mutual funds to retail investors. So, What’s exactly going on? 

Let’s find out. 

What exactly are ULIPs?

ULIP, or Unit-linked insurance plan, merges investment and life insurance. The premium is also divided into two components: one for the life insurance plan and the other for the investment plan. 

However, ULIPs mostly fail to offer sufficient insurance coverage. To put things into perspective:

If a term plan cover of Rs 60 lakh costs you Rs 9000 every year, it will cost you Rs 5 lakh per annum in the case of a ULIP.

They aren’t great from an investment perspective either because they have high charges associated with them. 

ULIPs- Pros and Cons

Well, it’s not all bad because, in recent times, ULIPs have been performing okay and not to forget they have tax benefits under 80C as well. 

Having said that, few things become a dealbreaker. ULIPs entail a compulsory lock-in duration of five years. During this period, access to the funds is restricted. 

If the policyholder discontinues premium payments, the life cover provided by the insurer within the ULIP ceases. Moreover, the amount paid so far will move into a discontinued fund.

In contrast, investors in mutual funds can exit at any time, subject to the payment of applicable capital gains tax and exit load, if applicable.

Also Read: Index Linked Insurance Products (ILIP): What are they?

What’s Going on?

Nowadays, a lot of relationship managers from banks are going to their customers asking them to invest in a particular “fund”. 

However, once you read the documents, you will understand that it is just a ULIP disguised as a mutual fund.

The reason many investors mistakenly perceive ULIPs as such is due to the terminology used in insurance company advertisements. 

The confusion arises when these ads incorporate terms commonly associated with mutual funds. 

For example, ULIPs are being positioned as a ‘new fund offering,’ including terms like ‘net asset value’ (NAV), creating the impression of a mutual fund. 

Another insurer’s ULIP advertisement extensively discussed ULIP fund schemes without explicitly using the word ‘insurance,’ and the mention of ‘life cover’ was discreetly placed in the fine print. 

Such tactics blur the investor’s understanding.

Therefore it’s important to be aware of what to watch out for. Here’s an example:

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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing.