This blog has seen its fair share of ULIP Products in the past and I have always been against ULIPs that charge exorbitant fees & charges from their investors as well as agents selling ULIPS just to make a fast buck. Unfortunately not many investors know about ULIPs and their fees & charges and have fell into the trap. The idea behind this article is to bring to your notice some shocking news I read in the new today as well as some suggestions for you if you are a prospective or current ULIP Investor.
Before We Begin:
I have always been strong in my views about confusing Insurance and Investment. Unfortunately the age old tradition of buying Insurance products for Investment is still prevalent in our nation and that is what has prompted this situation as well as this article!!!
So, what is this Shocking News?
Every year people surrender their Insurance Policies ahead of its maturity period even if it means incurring losses or penalties. You probably know that already. The actual shocking news is that in the financial year 2011-12 ULIPs comprised 97% of all insurance policies that were surrendered ahead of time by customers. This is the official % that was released by IRDA recently.
Is this really Shocking to me?
In May 2012, there was an article in this blog titled Should you Exit your ULIPs Now? which reflected the market sentiment about ULIPs. Personally I am not at all shocked to see this news because this was something that was inevitable given the fact that ULIPs were being sold like candies to the unsuspecting investor..
Why are customers selling ULIPS in this magnitude these days?
Reason 1: ULIPs are not investment products
Agents & Sellers of ULIP Products rarely mentioned the fact that ULIP Products are primarily Insurance products. Instead they sold them as investment products. Each of these agents had one fancy work-up calculation that would hypothetically predict a 20% or 30% returns year-on-year and say that if you Invest Rs. 2 lakhs per year for 10 years you will get something like 2 crores at the end of 15 years.
Not realizing that they are being lured into a honey-trap, unsuspecting investors bought these products with the hope that they too can be a "Crorepati" in 10 or 15 years.
Reason 2: ULIP Returns are linked to the Stock Market Performance
Agents & Sellers will never mention the fact that ULIPs aren't invincible. They will never tell you that your ULIP can make losses in case the market tanks. They keep lay the honey-trap so well that as an investor, you fail to realize that ULIPs can make losses and end up investing in schemes that are highly aggressive and invest almost the entire corpus in Stocks.
Reason 3: The Fees & Charges are not explained clearly to Investors
When the Agent is selling his ULIP Product to you, he will not mention the fees & charges the Insurance Company that is providing this ULIP Plan is going to deduct from your annual premium ever year. This is because these charges form a significant chunk of the premium you pay every year. So, realistically speaking around 10% and as much as 40% of your premium goes to the agent & his company just for selling this product to you.
Even in the mathematical work-up they show you, they will not consider this chunk that goes into their pocket and their calculation will always show that 100% of your investment is considered as an investment.
Reason 4: Investors are not told that ULIPs are LONG TERM and I mean REALLY LONG TERM investment products
Your Agent may tell you that the lock-in period is only 3 years and that you could exit any time you want after the 3 year period. Unfortunately what they fail to mention is that, in order for ULIP products to be really profit-making for the investor who is putting his hard earned money into it, the product has to be live for at least 10 years or more. ULIPs are long term products that can offer good returns after 10 or 15 years of staying invested.
Reason 5: ULIPs aren’t the only tax saving instruments
One of the biggest selling points for Agents is the tax benefit for Investors. There are numerous other tax saving products and many of them are 100% safe and don’t have the kind of risks that ULIPs have. So, don’t get fooled if your agent is trying to convince you that these are the best tax saving options. Unfortunately they are not. There have been many articles about tax saving in this blog.
Read the below:
1. Saving Income Tax through Investments
2. Life Stage based Tax Saving Portfolio
3. Best Tax Saving Options Available for Investment
So now, you are probably thinking, in spite of all this millions of investors did buy these products. What exactly went wrong?
What Went Wrong???
ULIP Providers are expected to send periodic statements to their investors. This was the problem. Read the timeline below from an Investors perspective...
Day 1: Mr. X Invests Rs. 1 lakh on ULIP ABC. Agent convinces him to invest in the Aggressive/Growth Equity plan because that can make him a Crorepati in 10 years
Day 90: Mr. X receives his end of quarter statement. He receives the biggest shock of his life. His unit holdings are worth only Rs. 65,000/- today because only Rs. 62,000/- actually got invested against his name 3 months ago after deducting all the fees & charges
Day 91: Mr. X calls up his agent and has an argument but gets stonewalled saying that these things were part of the Terms & Conditions and that he must've read them
Day 92: Mr. X thinks about cancelling his investment and continues his argument with the agent. He is told that if he cancels his plan he will get only Rs. 50,000/- after deducting all the penalties plus his tax benefit will be forfeited. So, Mr. X decides to continue investing for 3 years so that he can close the plan after the mandatory investment period
End of Year 1: Mr. X invests another 1 lakh to keep the policy active
End of Year 2: Mr. X invests another 1 lakh to keep the policy active
End of Year 3: Mr. X surrenders his policy in-spite of huge losses
Mr. X is one among the millions of investors who fall under this 97% population that have surrendered their ULIP policies for the reasons explained above.
Why is this number so high these past two years?
Actually speaking this surrender % was 98% at the end of the 2010-2011 financial years. The reason why it is so high now is because ULIPs were being sold in every street corner to unsuspecting investors across India around 2007, 08 and 09. Millions of investors purchased products that don’t suit their needs without understanding the charges & fees. All of them, just like Mr. X is forced to wait 3 years to even come out of the policy in order to salvage some amount of their investment. Anyone who invested during that peak period between 2007-09 would've waited for their 3 year lock-in and started to surrender their policies just like Mr. X.
This is exactly why the past couple of years has seen such a massive landslide surrender of ULIP Policies.
Is IRDA doing anything about this?
From their side, IRDA has brought in some mandatory requirements, trainings etc. for agents who sell insurance products and are trying to bring in more governance into the model. Unfortunately, not only sales-persons but also their regional bosses and everyone up the chain of command are only worried about the number of policies sold and the amount of premium collected and hence are selling as many policies as they can even if it means selling products to people who may surrender it as soon as the lock-in period expires.
What is my advice to prospective ULIP Investors?
Preferably - stay away from them.
If you are absolutely convinced about some ULIP product, check its fees & charges. If it is anything above 5% then you are probably getting yourself into an honey-trap. Ask the agent for a realistic projection of returns and ask him to skip the you will be a Crorepati in 10 years at 25% rate of returns. Tell him that the market is volatile for the past 3 years and you can’t realistically expect 25% returns year on year for the next 10 years. Ask your agent if he can guarantee this 25% returns. He will probably come down to a more realistic number of around 10% returns which is achievable.
What is my advice to current ULIP Investors?
The article Should you Exit your ULIPs Now? is just for you. Please read it.
Some Last Words:
The fusion of insurance and investment results in higher cost and lower risk coverage. For ex: If your agent says that a 1 lakh premium every year (to be paid for 10 years) will give you a 25 lakh insurance coverage, getting a term insurance plan for 25 lakhs and investing the remaining amount (from the 1 lakh) in a combination of good Mutual Funds and Bank FD's will definitely fetch you far better returns that what the ULIP plan your agent is trying to sell you will.
I repeat - For a given amount, the returns from a well-diversified portfolio are higher than the returns received from the insurance products. The charges involved with the ULIPs are significantly higher. These charges have a major say in deciding the premium we pay for the life insurance and the related benefits as well as the returns you get out of your investment.
Don’t put your hard earned money into a product where the agent, his boss and everyone else is making money while your investment value is eroding. Do your homework, be a smart investor and invest only in good products.