We have always brought to your notice that insurance is grossly Mis-sold in India, specially through banks. Last week received a comment on LIC Jeevan Vriddhi Article – which was shocking, as bankers are clearly fooling their clients with support of their bancassurance tie-ups.
Go through the Message from reader & Mail from HDFC. Also read what others have to say on Bancassureance Nexus including IRDA Committee.
Must Read – Exit Strategies for mis-sold insurance policies
Message that I got from the reader:
I appreciate the time and energy you spend in the financial education. Two weeks of going through the site encouraged me to walk into banks to open SIPs.
When I walked into HDFC for the last two SIPs, the Relationship manager tried to convince me for ULIPs. I wasn’t convinced then so I asked him to send me some explanation. The reply is appended below. At the outset, for long term the ULIP capital left after charges seen to be a lot compared to MF. Not sure what I am missing here. Basically the contention was that for ulips, the 1st, 2nd and 3rd year charges are 40 %, 15 % and 10 %. Thereafter it remains at 2 % of annual premiums where as in MF it si 2.25 % of the total corpus every year as maintenance charges. So if you were to invest Rs 100 every year for 30 years, for ulips you pay Rs. 119 as total maintenance charges and for MF you pay Rs.1046.25 at the end of 30 years. He said something about the fund charges for ULIPs being capped at 3 %. Has the ULIP policies changed since your articles on ULIPs ? Hope you could provide guidance
Mail that he got from HDFC
It is Shocking that he got this mail from HDFC Life Insurance but he is client of HDFC Bank. (CC in this mail was marked to HDFC Bank employee)
Further to our discussion please find the bullet points .
1. Long Term Perspective: The Fund Manager cannot have a long term perspective as MF are highly liquid. Whereas ULIPs are long Term in nature with a mandatory 5 year lock in period. Hence they have the better probability of generating better returns in the long term. Longer the money is invested more the returns.
2. Liquidity pressure: MF being highly liquid in nature AMC has to set aside a significant portion of money in liquid assets which are low generating Income avenues. Whereas ULIPs strictly invests as per the Fund opted and can afford to invest in Long Term Investment Avenues.
3. Retail Participation: In MF Institutional Investors also participate in the same fund. They always have the edge over any retail investor in terms research and analysis. Hence can influence the NAV as they invest in huge amount.
4. Fund Manager: The investment for AMC is being managed by individual Fund Managers ,Hence it solely depends on one person thinking who also happens to earn his reputation and earnings from the Fund Performance. Whereas in ULIPs there is a Committee comprising of Deepak S Parekh ,Chairman, Keki M Mistry and AK T Chari -Independent Director, Amitabh Choudhury-MD and CEO, Paresh Parasnis-Executive Director and COO,Vibha Padalkar- Chief Financial Officer,Srinivas-Appointed Actuary, Prasun Gajri- Chief investment Officer. The entry of exit of one person doesn’t effect the long term strategy of Fund Management unlike AMC.
Check – 10 investment mistakes to Avoid
5. Fund Management Charges: The charge is deducted while calculating the NAV .The average FMC ranges from 1.5-2.25% of the fund. The newer funds have higher fmc and the older funds have relatively less. Please find the impact of such charges over a long period of time. Also comparison with the charges deducted from the premium .Currently the Initial Allocation Charge is 4%,3%,3%,2%,2% for CREST- Free Asset Allocation and 1st and 2nd year -7.5% 3rd to 5th year is 5% and 6+ year is 0%.
Whereas in ULIP the charges are highly regulated and is capped at 3% over a 10 years and 2.75% for a period more than 10 years excluding the mortality charges.
6. Fund Options and Tax implications: The flexibility to invest in 5 fund options ranging from -100% Money Market Instruments to 100% Equity and various combinations of Debt and Equity .Fund switches can be easily done online .The maturity amount in ULIP is tax free irrespective of Debt+Equity Composition whereas in MF only equity investments for more than one year is tax free.
7. Fund Performance HDFC LIFE ULIP Products lease find the fund performance of all funds launched since inception of the company against the benchmark . Also attached in the zip file of the oldest 100% Equity Fund -Growth Fund with the portfolio details .(16% over a period of 7 years till year end 31st Jan 2012)
8. MF Fund performance over a period of 5 years till year end 13th Feb 2012. -Refer to OLM-50(Out look Money -7th march 2012).
Equity large Cap:
Min : Franklin India Index Nifty 5.65%
Max: UTI Opportunities 15.09%
Min : IDFC Imperial Equity -A 8.53%
Max: UTI Dividend Yield 14.95%
Equity- Mid Cap and Small Cap
Min: GS Junior BeES 8.16%
Max: Birla Sun Life Dividen Yield Plus 15.17%
9. Insurance Charges: Insurance Charges in the Term Assurance is paid in equivalent instalments over the entire period ie higher charges are recovered in the earlier part of the year and lesser is recovered in the later period of the contract period. Whereas in ULIPs risk charges increases with age and you pay as and when risk increases. A 10 times coverage also ensure ur financial objective is achieved even in case of any unfortunate event -A small protection against the targeted maturity amount.
Sky is not the limit in mis-selling…
Can someone write such a long message to sell one insurance policy or this is a copy paste which is going to lot of people??
I would not like to comment on the mail but would like to share – what others have to say:
Monika Halan, Editor Mint Money (Hindustan Times) recently wrote an article – Should Banks sell Insurance at all?
She wrote “With banks mis-selling and not taking responsibility, and RBI unwilling to take the brokerage route, why sell insurance at all?”
Article also quotes one point from published report – bancassurance draft guidelines by IRDA committee.
The committee worries about the unequal relationship between banks and insurance companies and it says: “The insurer ends up paying a fat upfront fee running into tens of crores, at least one-fourth of the prospective business, training costs, infrastructure costs to the bank brochures, expenses towards the transactions, incentives, travel, entertainment for the bank staff are some of the heads under which the insurer is fleeced. The accounts at both ends are opaque and the payouts exceed the prescribed commission by a large measure.”
It is interesting to note that what Deepak Satwalekar(retired CEO of HDFC Standard Life Insurance Co.) have to say.
“…as stated by the IBA (Indian Banks’ Association) representative, the banks are unwilling to assume any responsibility, or risk, of the result of their mis-selling. RBI is also wary of banks taking on the role of a ‘broker’ as it would mean that they assume the role of a ‘principal’ in the sales process with the consequential responsibility and potential risk. Possibly the banks are better aware of the deficiency in the sales process practices by them and hence their reluctance to assume any risk.”
Recently an article from employee of Goldman Sachs is making buzz – this shows conflict of interest between bankers & client is same across the globe. You can read that article here – Why I am leaving Goldman Sachs
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
He further adds – What are three quick ways to become a leader in Goldman Sachs?
a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.
b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.
c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
But we can’t always blame the seller. Bemoneyaware wrote an interesting article – It’s Mis-Selling or Mis-Buying: It’s My Money, My Responsibility
There is a quote in Hindi Chahe chakko tarbooz pe pade ya tarbooz chaooke pein par katda to tarbooz hi hai (If knife falls on water-melon or water-melon falls on knife it’s the water-melon that will get cut). As it is your hard-earned money you have to take responsibility for a fool and his money is soon parted. Do you think products are mis-sold or mis bought? Is it only insurance products or ULIPS but others too? Do you think we need to take responsibility for our actions ?
Also read our earlier articles on the same issue:
If you have ever faced a similar situation– must share it in comment section, it may be of great help to other readers.