I am a salaried worker in the private sector. I am interested in saving for my eight-year-old son. I am confused between ULIP and traditional insurance company plans. Please guide me.
Please understand the most important principle of investing: never mix protection and investment needs and buy different products for each need separately. You should buy a pure-term plan for your life cover and invest in a diversified scheme of any good mutual fund house. Though ULIP is sold as an investment product and not an insurance product, please understand that the ULIP plans have various continuing charges, reducing your overall investment return.
ULIP plans have a liquidity problem
Moreover, ULIP plans have a liquidity problem, as you cannot receive money from your ULIP investments before they expire in five years, even if you surrender them before five years.
Traditional plans of life insurance companies do not offer good returns
The traditional plans of life insurance companies do not offer good returns, and historically, the returns have been equal to those offered on savings bank accounts. Such returns are not even able to beat inflation. In ULIP and traditional plans, you neither get adequate life cover nor adequate return.
You must buy life insurance coverage equal to 15 to 18 times your annual income through a term plan, preferably online if you can. The balance can be invested in the ratio of 90% in the Diversified Equity MF Fund or the balance of 10% in PPF and Sovereign Gold Bonds. It is also advisable to decide the corpus you want for their future at a particular age and then start investing accordingly through monthly SIP in equity funds of the appropriate amount.
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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on his X handle.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
