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ould avoid while drawing up your investment plans for the new year

2011 some chalked HAS order out arrived in some . resolutions Most life. Just of you as a to would bring about exer have - your regular cise regime or healthy eating habits are important for good health, financial wisdom is equally important to keep your money intact and growing. As most of you must be drawing up plans for tax investments as well as regular savings, ET lists out some sales pitches that you should strictly avoid.

'Invest In Ulips For Only 5 Years':

Beware of your insurance agent if he tries to sell you a Ulip as five year policy. Often the agents use this as a sales pitch as it's difficult to convince customers to lock in money for as long as 10-15 years. "The logic is that it is always easier to tap a customer to get into a short-term contract. The concept of a lock in and annual/quarterly frequency in premium payments is not very popular with customers. Ulips are very popular among customers than a simple term plan," says Rahul Aggarwal, CEO at Optima Insurance Brokers. Pranav Mishra, senior V-P & head, products, ICICI Prudential Life Insurance says, "If you anticipate some liquidity need in one to three years from now, Ulips is not meant for you. You should look at this investment product only if you leave your money untouched for be-yond five years. A good time horizon would be around five years to 30 years." For example, if you invest . 1,00,000 in a Ulip for 30 years, the first year return will be negative at around 80,000. This is because the investment amount itself shrinks to Rs. 75,000 after accounting for charges such as mortality, policy, allocation and fund management. However, the investor breaks even after the fourth year and doubles the investment in 30 years. Even if the investor locks in for 15 years he earns Rs.20.5 lakh if he has invested Rs.15 lakh. Ulips are designed in a way that they attract maximum front loading in the first 3-4 years of the policy. So, stay long to reap maximum benefits.

'Take Home Loan Insurance':

The aspiration to own a house comes with a heavy price tag and a huge liability. Until you pay off the loan, it doesn't become your house in the true sense. Hence, you have to cover the liability so that your family doesn't have to shoulder the burden of EMIs if something happens to you during the tenure of the loan. Although the home loan insurance policy works similar to a term life insurance policy, term cover is the cheapest option. The risk cover/ sum assured will be equally to the outstanding loan amount at any point of time. But home loan insurance works on a reducing balance principle. As the outstanding loan amount reduces, the size of the cover also decreases. "The biggest advantage of a term plan is that the risk cover (sum assured) remains constant in a term plan over a period of time whereas in a home cover, it is a declining cover," says Amar Pandit, certified financial planner, My Financial Advisor.

Let's assume, an individual takes a 20-year housing loan of Rs. 50 lakh at 9.5% as on November 2010. At this time, he would have also opted for a Home Loan Protection Plan (HLPP) with a sum assured of Rs. 50 lakh by paying a single premium amount of Rs. 1,72,650. By December 2017, the outstanding loan amount would be over Rs. 41 lakh. If the borrower dies at this stage, the insurer will pay off the balance Rs. 41 lakh directly to the bank or the borrower's family. If this example had to be extended to the term cover, the family would get the entire sum assured of Rs. 50 lakh. Even after settling the loan amount, the family would still be able to make a saving of Rs. 8 lakh. Secondly, an HLLP involves a one-time premium whereas a regular term plan requires periodic premium payments. "You are spreading your payment over a period of time and hence the outflow for a certain risk cover is much lower in a term plan," Pandit adds. Hence, stick to a conventional term plan at an early age and benefit from lower premiums. You can actually park the surplus funds in high-growth instruments such as equity-linked savings schemes (ELSS) initially, which also provide similar tax breaks instead of locking in at higher premiums.

'Don't Buy Term Insurance For Saving Tax':

People don't invest in a term plan as they don't earn a return if they outlive the policy term. However, there are term plans with return of premium options, which are 30-40% costlier than a regular term plan. "A customer is ready to invest in a child plan for the child's future, a pension plan for retirement and in Ulips for equity without realising there are better and cheaper options available in the market. Insurance is meant for protection and customers shouldn't mix investment with protection. Otherwise the premium outgo will be as high as Rs.3-4 lakh, which will constrain the cash flow severely. Also, these policies have expensive exit options," says Suresh Sadagopan, certified financial planner, Ladder 7 Financial Advisories.

'Invest In A Child Plan Like Mr Sharma':

Most investors suffer from herd mentality. There was a time when child plans were a rage and almost every parent believed in the instrument. The question is not whether child plan is the best option but whether an investor knows his requirement, financial and risk-taking capacity before choosing it as an investment option. Keep your milestones in mind before entering into any investment.

'Buy Insurance Because Everybody Needs It':

Everybody requires mediclaim or health insurance but not life insurance. There is a small exception to this rule. Just as insurance is very crucial for most individuals, there are certain categories of people who need not buy life insurance at all. This largely includes non-earners, housewives who have no source of income, individuals without dependents. "The right approach to buying life insurance is to consider whether the risk has the potential to jeopardise the family's future. Hence, if a home-maker's spouse earns enough for the entire family and she has no source of income on which the family is dependent, she doesn't require insurance. If the husband is still keen on investing in her name, he should be the main policyholder and add the spouse as a nominee. There is no doubt that duties and responsibilities of housewives are selfless and incomparable. However, when it comes to life insurance, one must make a thorough assessment of individual situation and then take a prudent call," Pandit adds. So, the next time your agent woos you with some product brochure, ask him the right questions and take an informed decision.

POINTS TO PONDER

ON ULIPS

* You should invest for at least 10 years or more in Ulips to earn good returns

* Ulips attract maximum front loading in the first 3-4 years of the policy. Hence, stay put to reap maximum benefits

* Agents promote Ulips as five-year policies, as they earn the maximum commission in these years

* Ulips are also popular among insurers as most companies achieve 80-90% of their total sales from them

* Insurers categorise

* premiums into risk premiums and investment premiums. They make the most money from investment premiums

ON HOME LOAN INSURANCE

* Home loan must be covered given the sheer size of the liability

* It will help family members shoulder the burden of EMIs if something happens to the main borrower

* Term insurance is more comprehensive than Home Loan Protection Plan (HLLP)

* The risk cover of term insurance will be equal to the outstanding loan amount at any point of time.

* An HLLP works on the reducing balance principle. As the outstanding loan amount reduces, the size of the cover also decreases

ON TERM INSURANCE

* Term cover is the cheapest option

* Buy term plan at an early age and benefit from lower premiums

* You can park the surplus funds in high-growth instruments such as equity-linked savings schemes (ELSS)

* Buy term cover for the maximum possible tenure

* There are policies that offer return on premium but they are more expensive than term cover

Source: http://epaper.timesofindia.com/