Investor paid a premium of Rs20,000 to invest in a unit linked insurance plan (Ulip) in October 2005. At the end of one year, when he received the policy statement, he was surprised to see that the total value of his investment was just Rs9,075. He wondered where the balance Rs10,925 had gone.

Ulips are insurance policies which club insurance and investment. Usually, an individual taking a Ulip has 4-6 choices, ranging 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, for which the insurance company levies a monthly charge.

What investor did not know is that the entire Rs20,000 he had invested would not be invested.

There were expenses to be paid. In the first year of his ULIP Policy, the insurance company had made an allocation charge of 25 per cent of the premium paid. What this meant was that of the Rs20,000 he had paid, only Rs15,000 was invested.

Other outgos(charges), like policy administration charge, and fund management charge, had ensured that instead of his money growing in value, it had shrunk.

The premium allocation charge in the first year of the policy varies from 15 per cent to 71 per cent of the premium paid, depending on the Ulip chosen. So, why do Ulips have such a high upfront charge?

Historically, insurance commissions have always been high. The insurance industry tends to justify this practice, using the defence that selling insurance is tougher than selling other financial products.

While this itself is arguable, in any case, since these commissions are deducted from the investment, it is the investor who suffers.

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