By Sandeep Shanbhag

Unit Linked Insurance Plans or ULIPs are insurance policies, which club insurance and investment. Usually an individual buying a ULIP has four to six choices while choosing his investment mix. These range from funds investing 100 per cent in equity to those investing 100 per cent in debt securities. Other than this, the policy holder gets an insurance cover as well. So far, so good. Yet, there are more things you need to keep in mind, when investing in ULIPs. 

High upfront charge
Just like mutual funds, ULIPs have a load too. A load in terms of ULIPs is known as the 'premium allocation charge'. This charge is usually high and varies from 15 to 71 per cent of the premium paid depending on the ULIP chosen.

In other words, it is only the net premium after deducting this charge that gets invested. And remember: the per annum return that the ULIP generates is calculated on the net money invested and not on the entire premium that you have paid.

A significant proportion of this charge is passed onto an insurance agent as commission. From the third year onwards, most ULIPs have a premium allocation charge anywhere from two to five per cent. Typically while selling the policy, insurance agents/advisors do not fully apprise and explain the nature and details of the charges to the unsuspecting investors.

There's no way you can choose the best ULIP

When an individual wants to invest in a mutual fund he can log onto web sites like moneycontrol, valueresearch etc and ascertain the best performing schemes. In other words, mutual funds, since they have a homogeneous structure, lend themselves to inter-scheme performance.

But the same is not possible in the case of ULIPs as each ULIP will differ in terms of the upfront expenses. Which means, the investor has to pretty much go with whatever the agent tells him or her.

And unlike mutual funds or other investment instruments, generally an insurance agent cannot sell products from different insurance companies --- he has to sell only those products that are issued by the insuranace company he represents. In such a situation, getting unbiased advice is rare.

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The writer is director, A N Shanbhag NR Group, an investment & tax advisory firm. He may be contacted at sandeep.shanbhag@moneycontrol.com