Saturday, October 23, 2010

Are ULIPs Good Investments?



The unit linked Insurance plans are simply called ULIP. ULIP are financial instruments which will give a term insurance coverage and, investment in stocks  In ULIP, the premium paid by investor goes to two separate investments. One goes for your insurance and the other goes for the investment in stock market. The insurance part consumes less amount and the investment plan consumes more amount. But, in the first year, a major portion of the premium goes to insurance companies as administrative costs which includes the commission paid to the Agents.
So, in the first year, a major chunk of the premium goes to the company and a small amount of the premium is invested in stocks and a small portion is taken for the term insurance. From second year onwards, the administrative costs will be reduced substantially and the balance will be used for investment in stocks and also for the insurance.
If the premium is paid for a long period, at the end of the maturity, one will get a good return. Will this investment option get benefit to the investors? Stock market investments are destined to give good results in the long term, say, more than 10 years.
But people attracted to these plans only during bull market. Their investments get eroded in the next bear market. Now they get confused whether to hold or get rid of it or to invest more. As I said earlier, stock market are bullish in the long term, always, and it will give good results in the longer run. So if an Investor continues his investments even in bear market surely investment in ULIPs will be beneficial.