Dipankar Jakharia
Not a single week goes by when I am not asked by my readers about an ULIP policy they have invested and now feels as if they have been ripped-off by it. I have written many a times before and ready to write many a time in future about the great Indian ULIP loot. Let us start from the beginning.
It all began a decade ago when three million insurance agents, which took home up to 40% of the first-year premium as commissions. The sellers of these products got commissions for the period 2004-05 to 2011-12 totalled Rs.1.13 trillion, said a recent study. The regulator, in July 2010, was forced to step in and change the rules around the product (i.e.ULIP). But the damage had already been done.
What triggered the tsunami is the structure of the agency payout. The first-year commissions went as high as 40% in the first year; commissions go down to 7.5% in years 2 and 3, and then drop to 5% by year 4 and remain constant thereafter.
It accompanied with a lock-in period of the invested amount for three years after which the investor could stop paying the premium and surrender the policy. But if the investor did not fund the policy anymore than the rules allowed insurance companies to deduct up to 100% of the value left, for payment of the commission and other costs.
And even after the lock-in was over, high surrender charges ensured that investors got very little money back if they stopped paying premiums.
The reason this mis-selling took place, because ULIP was sold as a three-year money-doubling plan. The agents or companies did not tell the investors that they needed to keep funding policies every year for at-least 10 to 15 years to generate any meaningful return.
But the panic began when they looked at their account statements at the time of the second or the third year premium, they realized almost all their money had got deducted as costs. Those expecting double the money at the end of year 3 found their fund value to be less than half of the total money they had invested. Many people stopped paying premium after feeling cheated after second or third year.
With mounting public pressure Insurance Regulator IRDA acknowledged the problem . In July 2010, the regulator changed the rules of the game around Ulip and took away the most toxic features that allowed mis-selling, which is colossal commission and increase the lock in period. In September 2010, IRDA brought out guidelines on ULIP product design and on surrenders. The rates of lapsation have come down since the regulatory reform.
No surprises here, the biggest gainers in the great Indian insurance rip-off were the agents and the insurance companies themselves. Irony is all the money of the people who fell into the trap and decided to stop funding their policies was siphoned between the company and the agent.
This big opportunity of introducing Indian masses to equity market was lost and in the chaos of suspicion and ignorance, paved the way of going back to gold, sadly!
Q&A
Q- I have invested in an ULIP product of lifetime super pension from a private insurance company. I have paid first 3 years premium with cover continuance option starting from September 2007 with an annual premium of 5 lakhs and the last and third premium was paid on October 2009 . But premium was not paid last three years as I was diagnosed with stomach cancer and in January 2012 went with a major operation and have completed 8 course of chemo by August 2012, now on follow ups . Please advice how to go about, whether to close policy or continue?
Mr. Inakhe Yepthomi via email
Ans: Since it is a ULIP product bought before the ULIP reforms happened (September 2010), I believe you have paid a heavy loading charge. And not continuing with it will eventually eat your fund values every year.
By this time you must have understood ULIP's are a 15 year old product, not as told by agents as three. Normally I never advice anyone to discontinue an ULIP policy, specially after paying it’s initial three years of high cost. If you can't continue or not interested, than you have no option but to surrender the policy. Since it is a market linked policy, have a track on the market and withdraw when the market goes up (which might give you some respite).
To invest in Equities Mutual Fund is a far better route with minimum wastage of money. And one should embark on it if the investment horizon is at-least 7 years. And never to invest in lump-some but break it into monthly equal amounts and invest in a minimum period of three years. By distributing your investment you safe guard your investments of market volatility. And beware of advices which might ask you to move to traditional insurance products. Agents are converting ULIP policies to traditional ones as Insurance Companies have increased the commission on traditional products after IRDA has capped the commission on ULIP.
For pension plan you should explore MIS from post office. Post office has some other great products best suited for retires. Problem is no one sells them.
Wishing you a speedy recovery and all good health in years to come!
