Is Having Multiple ULIPs a Wise Choice?
Recently, I had a long-overdue catch-up with a friend who shared insights about the various insurance policies his family has acquired. There are four members in his family: himself, his sister, and their parents.
His father, who is employed, holds a LIC policy with a significant sum assured and has also invested in a ULIP for himself, contributing to it regularly. Additionally, he’s taken out a ULIP for his wife, a homemaker, which he also funds consistently.
My friend, 29 years old, has been unemployed for the past two years due to several circumstances. During his working years, he purchased a ULIP from SBI Smart Wealth Builder Policy (SA: 15 lakhs, PPT: 5 years, PT: 20 years) and completed his payments a couple of years ago. He also holds an LIC Jeevan Labh policy (SA: 60 lakhs, PT: 25 years, PPT: 16 years), which his father has been paying since his son lost his job.
His sister has just started earning approximately 3 lakh per annum and has taken out PMJJBY and PMSBY.
Most recently, their father acquired a ULIP from ICICI PruLife Platinum Growth for his children (himself and his sister) with a maturity date around 2066 (PPT: 5 years, annual premium: 10 lakhs split between the two of them).
To top it off, the family members also have their own health insurance.
After hearing about their extensive insurance portfolio, I took some time to reflect and offered the following advice:
i) Consider surrendering the mother’s ULIP when the market improves. Use that amount to invest in mutual funds, either through a financial advisor or directly. Since she isn’t earning, any insurance for her beyond health coverage is unnecessary.
ii) Likewise, I suggested surrendering the father’s ULIP when the market is favorable, as he already has adequate coverage from LIC. If additional coverage is necessary, he could either top up the current LIC policy or take out a new LIC policy (non- linked, participating or non-participating). The funds could then be redirected towards mutual fund investments.
iii) I advised my friend to think about surrendering his ULIP when the market is better, given that he already has an active LIC policy. Similar to his father, if he requires more coverage in the future, he should consider topping up his existing policy or buying a new one once he resumes employment. The amount saved could also be invested in mutual funds.
iv) For his sister, I recommended taking out an endowment or money-back insurance policy through LIC or the Post Office as she becomes more financially independent, while discontinuing PMJJBY and PMSBY.
v) Lastly, I suggested that the recently acquired ICICI ULIPs may be unnecessary. Their overall returns are likely to be lower than direct investments in mutual funds (either independently or through an advisor).
It seems that the family has accumulated multiple ULIPs largely influenced by bank recommendations.
Do you think they have an abundance of ULIPs that could have been better invested in mutual funds, stocks, fixed deposits, or recurring deposits? Given that the earning members already have life insurance coverage, I would like to gather your thoughts to guide my friend towards a more cohesive financial strategy.
It sounds like your friend’s family has a well-intentioned but potentially overcomplicated insurance and investment portfolio. Here are some constructive views to consider:
Understanding ULIPs: ULIPs (Unit Linked Insurance Plans) can serve as both insurance and investment. However, they may not always provide the best returns compared to direct investments in mutual funds or stocks, particularly due to fees and charges associated with ULIPs. If the primary goal is investment, it’s essential to evaluate whether the ULIPs are the best choice.
Life Insurance Needs: Assessing the actual life insurance needs of each family member is vital. If the father already has adequate life insurance coverage, it might make sense to avoid additional ULIPs for him. Life insurance should ideally provide protection, so it’s important to ensure that the coverage is appropriate without being excessive.
Surrendering ULIPs: Your suggestions to potentially surrender the ULIPs for the father and mother make sense if their primary purpose was to create wealth over time and if there are regulatory penalties or market conditions that favor such decisions. However, it’s essential to carefully analyze the current market conditions and consult a financial advisor before making these decisions, as surrendering insurance products can lead to financial losses due to surrender charges.
Investment Alternatives: Reinforcing the idea of directly investing in mutual funds, stocks, or other investment vehicles instead of relying heavily on ULIPs could lead to better returns in the long run. A diversified approach to investments—some in equities, some in fixed income, and some in health insurance and term life insurance—might provide a balanced financial strategy.
Health Insurance: It’s commendable that each family member has health insurance. This is a necessity and should be maintained, as it provides essential coverage against medical emergencies.
Financial Independence: For your friend and his sister, focusing on building their financial independence with direct investments may be beneficial. This can allow them to once again take charge of their finances, especially as they progress in their careers.
Role of Financial Advisors: Consulting with a certified financial advisor for personalized advice could help clarify investment options and align them with the family’s financial goals. It can provide insights into the appropriate asset allocation and risk tolerance.
Long-Term Perspective: Encourage a long-term investment perspective. Compounding can significantly benefit wealth accumulation, so starting early with mutual funds or diversified equity investments can lead to substantial growth over time.
In summary, while having some insurance coverage is necessary, the family may want to streamline their approach by minimizing redundant ULIPs and considering direct investments in other financial products for better growth potential. Your advice is thoughtful, and it could lead them to a more straightforward and effective financial strategy.