Why Ban on ULIP ?




ULIP FightOn 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.

S SEBI

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.

Regulatary Bais

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.

“Just to Clarify – ULIP issue” Interview Live Mint

Conclusion

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.

What should existing investor do now..

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.

New investor who were about to buy a ULIP are well advised to take TERM Insurance and start SIP in Mutual Fund.

Please add Your Comment: Your comments will help us to write better in future.

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{ 18 comments… add one }
  • Harbinder Mehra April 17, 2010, 8:17 AM

    Very informative article.

    Good show especially the video with the back ground music.

    All the best !

  • TFL April 21, 2010, 11:32 AM

    Thanks Harbinder.

  • unni April 22, 2010, 11:04 AM

    As one involved with marketing ULIPs, I have never been convinced of these products. It is so unfair to shave off so much money from the gullible investors from their annual contributions. Especially, growth of their investments get muted when some portion is removed from the pie.

    It is surprising that IRDA has reservations about SEBI getting involved & regulating such products.

    • TFL May 3, 2010, 6:50 AM

      Thanks UNNI that you contributed your experience.

      Hope readers will learn from it.

  • TFL April 26, 2010, 5:52 PM

    Comments from Linkedin Group Members:

    Long awaited action which SEBI should have taken before. Its the way the ULIPs are mis-sold by agents as an investment tool for 3 years like ELSS when its beneficial only if you have been in ULIPs for atleast 10-15 years.

    Plus the insurance component in ULIPs is hardly anything to talk about as compared to the investment component.

    Also, SEBI has wanted all such investment products to have zero entry load while with ULIPs its still almost 20 odd percent.
    By Jaspreet Oberoi Project Manager at naukri.com

    Sebi is doing good. A crackdown was long due.
    Besides SEBI has the responsibility and need to be able to come after all mkt participants.
    By Aseem R Experienced

    Very Simple. An insurance agent earns more as high as 40%
    By Mathews Prabhakaran Director, First Insurance World Broking Services P. Ltd.

    SEBI is doing Good Job, because of ULIPs are Mis-sold by Agents & also Company’s Manager …
    By Sachin Gohil Head – Gujarat at CareerNest HR

    very good article by TFL, they should have banned it long back.. the managers r equally if not less responsible than the adviser gullible advisers…
    By C.R. Nihar Channel Head Distribution in Telecom Company

    I have never been convinced of ULIP though I have been professionally involved with marketing these products. It was unfair to the gullible investor to shave off so much money from his investment.

    I am surprised IRDA has reservations about SEBI regulating such products.
    By unni kk Independent Real Estate Professional

  • Arvind January 17, 2011, 1:05 PM

    good article. Thanks.
    unrelated to this one i would like to suggest you do an article on ‘time concept of money’.
    i’ve seen veteran ‘investors’ innocent about this concept.

    • Hemant Beniwal January 18, 2011, 7:14 AM

      Sure Arvind we will write on it very soon.

      Thanks for the suggestion.

  • A A Agrahari May 8, 2011, 3:14 PM

    I think Term Insurance+SIP in Equity Diversified Mutual Fund+PPF(full limit that too on 01st April of the financial year) is a very good, simple and a deadly combination for any investor looking for a descent corpus in long term.

  • vamsi May 10, 2011, 8:58 PM

    Hi Hemanth,

    I’m a s/w employee and started planning my investments.So, I planned to take a ULIP (in next two months) and started searching the pros and cons of it. I got the same kind of info. in an other site too but it has mentioned this procedure has changed to some extent from sep 2010 and it’s up to me to decide what to do.
    could you plz help me out what might be the best investment plan for me to proceed.
    amount i can invest :20,000
    future plan : for my further studies or to start a small business ( im not clear about it)
    expected return : 12-18%
    duration: 3-5 years (At max I can wait)

    I read your other articles too..your blog is good at providing financial planning information.Thanks a lot for that.
    Im intersted to do certification in financial planning. can you please provide the information for that too..

  • deepak August 25, 2011, 1:42 PM

    Hi Hemant,
    My son has taken a jeevan anand policy for sum assured for rs 10,00,000/-for a premium of rs 35000/-a yr .He has already made two payments on the same.How does he get out of it without suffering much of a loss.He can pay for a yr or two more if required in case the loss is less.

    • tinks November 12, 2011, 3:52 PM

      Hi deepak,
      It’s a matter of serious concern but nevertheless I will suggest you to continue this policy for one more year and then make this policy paid up. Instead of this policy your son can take a Term plan from Birla sun life protector plus and Kotak E-term Preferred Term plan. Say, his current income is Rs 50000 monthly as he wants to retire at age 55 currently say age 30 then he should take a term plan for 25 years for a SA Rs.50 Lakh.(This should be approximately 10 -15 times of income.

  • Sangram November 28, 2011, 7:27 PM

    Hello,
    Your articles are one of the best I ever came across. Thank you for such a great information !
    I have HDFC ULIP plan since Jan 2007, with premium of 50,400 pa and sum assured 10,00,000. As locking is of 5 years, in Jan 2012, will it be ok to surrender it or should i just stop the monthly premium and keep the policy on hold? Can you please give me some suggestion on this? I think I have done a big mistake by investing in it and lost my valuable 5 yrs time(and money) .
    It will be immencely helpful for me if you guide me for some other investments which will help me to recover the loss.

    Thanks in advance.

    Regards,
    Sangram

    • Vikas December 9, 2012, 9:56 PM

      Dear Sangram,

      By stopping future premiums your policy will still incur annual charges which will be deducted from your fund value. This will hit your investments. Hence, continue the product only if you wish to contribute future premiums for longer horizon.

  • Jignesh September 6, 2015, 7:20 AM

    I have paid premium of LIC’s regular plan , pain for more than three years. It’s not ULIP.
    Can I stop paying further?
    Will they give me maturity value at maturity period?

    • Vikas September 20, 2015, 12:03 PM

      Jignesh,

      If it’s a regular plan and you have paid three years premium then there are two ways to exit:

      1. Surrender- in this case the company will pay you part of the premium paid . In general its 30% of total premiums paid excluding the first year premium.
      2. Paid Up- In this case your SA is reduced according to the premiums you have paid and the amount is paid at the maturity.

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