On Sunday morning when people got up and read news papers, many got a shock of their lives and many were worried as well. Not that any calamity happen nor government raised any taxes. The news was “Banning of ULIPs” which made investor worried about their investments in various ULIPs which they were sold under some obligation or by showing some handsome return in future. Though, by now, lot many things have heard about fight between IRDA and SEBI, this fight is getting uglier day by day. Many of you would have called your agents or discussed to your friend and colleagues, but let us tell you why SEBI had to take such a harsh action.
Problem of Under – Insurance
As per PFRDA Chairman, D Swarup Committee report, the average sum assured of insured is less than Rs. 90000. In Case of ULIPs, the sum assured is even less than the average sum assured and stands at just over Rs. 26000/-. Now, it is clear that Indians are grossly under insured and all the policies which are sold are mostly investment linked insurance where insurance element is negligible.
The order of SEBI clearly states that the insurance charges deducted in the form of mortality charges are generally less than 2% of the total premium, the rest goes towards other charges and investment which are similar to Mutual Funds. IRDA is regulator for insurance in India and SEBI for investment in “securities”. Mutual Funds(collective investment scheme) comes under the definition of security, hence SEBI wants to control the investment part of policy which account for more than 90% of your premium.
ULIP Vs Mutual Fund
ULIPs are expensive and complicated investment products. The investment are similar to mutual fund products and policy holder is allotted units based on which his returns are calculated. But when compared to mutual funds, they are very complicated. An investor seldom understand the language and set up of ULIPs, whereas mutual funds are far easy to understand. Apart from that, ULIPs are very costly product where your agent get high commission in the first year of its sale. The commission is as high as 40% in many of the policy.
Basically, ULIP is 10 to 20 years product and its best when someone buys for that long. But the commission which agents should get for the entire life of the product is bundled into the first year’s commission and hence they make most of their money in the year of sale. After first year, agent are not greatly interested in investor and once again. he tries to sell another new policy on which he will again make 40% commission. Most of the time, after 3 year are over, the agent will churn the old insurance money into the new one and again fool the investor.
You would be surprised to know that large number of policies in ULIPs are lapsed after payment of the first year premium especially in Tier II, Tier III cities and rural areas because agents afters collecting first year premium, just don’t appear once again. Many Banker sell, Regular Premium Paying Policy as single premium policy just because they make huge money out of it. When the investor does not pay the second or subsequent installment, the insurance company just forfeits the money. 40% of the first year goes towards Agents commission and 60% remain with insurance company.
Just take a look at this video that would show the way Innocent people are robbed by Insurance Agents.
This video Misselling of Insurance-ULIP was shot in one MELA in SRI Gangaganagar. Pamphlet Game
Now take the case of mutual funds, there are no upfront charges and it is in the hands of the investor to pay for the service which the agents provide to them. Because insurance product is highly remunerative, there are over 30 lacs insurance agents but less than 80000 mutual fund agents.
Now do you think, IRDA is not aware of this. These fact are well known to all who are in this industry and many times published in Media as well.
D Swarup’ s Committee Report which recommended No LOAD Structure in Financial Product said, “Agents advise where they get good money”
There are over 30 lacs insurance agent and just over 78000 Mutual Fund distributor. After abolition of entry load, the mutual fund industry witnessed drop in their business and ULIPs sale have marched ahead. Do we have to explain, why?? Its common sense. But then as an investor, where do you loose and which is beneficial for you, it is better left to you to decided.
There is a clear regulatory bais and two regulators have locked horns over ULIP issue.
SEBI was established to make for the benefit of the investor and to protect their interest and they have been continuously working towards investor protection. Just to give you some example,
1. Abolition of entry Load
2.Reducing number of days for IPO subscription so to curb malpractices
3. Correcting Dividend strategy of Mutual Fund
There are number of instances which can be quoted let why not quote FINANCE MINISTER OF INDIA
“Turning Mutual fund’s advisors to investor’s advisors is good step by SEBI for the benefit of retail investor.”
And what does IRDA doing here….
They are protecting Insurance Industry and Insurance Agents…But where are the investors here..
IRDA wants companies to pay to agents to sell their policy. Now when an agent will get paid from the manufacture, he will work for the benefit of the manufacturer and not for the investor.
- There is rampant misspelling happening in case ULIPs. But IRDA is silent
- There are less then 5% of Indians who are insured. Indians have not understood insurance. But IRDA is silent
- Out of those insured average Sum Assured is less than Rs.90000 and less than Rs. 26000 in case of ULIP. But IRDA is silent
- Media has pointed out this kind of mis-selling number of times. But IRDA is Silent
On the top it, IRDA advantage ULIPs.
Please take out 10 Mins & listen to this audio of Ms. Monika Halan, Consulting Editor Mint(Hindustan Times). She is Certified Financial Planner & promote Financial Literacy.
Important point in interview : Why peolple make such mistakes, Why Agents Push ULIP, How its mis-sold & best one Mutual Fund is a Car – ULIP is a Truck.
Indian financial industry is seeing some major changes where from guaranteed return products, we are moving in times where returns will be market linked. Here empowering investor is utmost important so that they make the most by understanding products. If an average Indian does not understand how to deal with such changes, he will land up loosing money making lesser money.
1. Review your policy.. It was grossly mis-sold.. open your policy document and look at the expenses you have incurred..
2. Deposit the premium in case 3 Years are not over till the insurance companies allow you to do so…
3. After paying the third year premium, it is upon you to decide whether you want to pay further or not. Even if you decide not to pay, it is not going to harm you in any manner and the policy will continue as it is.
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