This should be your response to clients:-
- Yes, it is true that Ulips are tax-free and mostly, they also have lower fund management charge. However, this is not the whole story. You must consider other facts.
- Ulips are not fully investment product. They carry a component of life insurance (min 10 times to be tax-free). This component has a cost as mortality charge. This reduces your overall returns. Most Ulips come with some upfront cost (entry load) and they also have some minimum fixed annual maintenance cost. This also impacts your total returns. Because of such charges, the break-even point of a ulip policy vs mutual funds is between 7-10 years in most cases. Ulips score in costs only if you consider investment for more than 15-20 years.
- If for any reason, performance of a particular insurance company is not good, you don’t have a choice to redeem easily and switch to another insurance company’s Ulip. In mutual fund this is very easy.
- While a few Ulips may have done well in performance, mutual funds have done far better across the universe.
- Yes, lower recurring cost and taxfree nature of maturity are positives for Ulip and you may consider a small investment diversification in Ulips if you are also looking for life cover. But given the track record of mutual funds, a larger portfolio should be allocated towards them.