Read this before you buy a new ULIP Policy

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?

Actually No.

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.

Happy Investing!!!

Are ULIPs becoming Obsolete?

Well, you might think I am crazy to ask such a question and I would be surprised if you dint… yes, you read the title right, are Unit Linked Insurance Plans becoming Obsolete?

The purpose of this article is not to tell you what an ULIP is or whether to invest in ULIPs or not. I have already dedicated a few of my older articles to do just that. You may want to visit them to understand them better.

1. Introduction to ULIPs
2. Can ULIPs Really Guarantee Returns

Are ULIPs Really getting Obsolete?

It has been a testing time for all equity market investors world wide. The stock markets are volatile and people are cautious before they invest their hard earned money in stocks. But, at the end of the day, stock market instruments are still one of the best preferred investment options for everyone.

But, it is such testing times that can spell the doom for certain investment options. In this case ULIPs or Unit Linked Insurance Plans.

Insurance Agents have been selling ULIPs like crazy and People have been buying them for years. In the past few months, Equity investments made by insurance companies went downwards, as policyholders surrendered some unprofitable old ones to shift to more attractive new products. To add to the woes of the ULIP sellers, regulatory changes did not help either.

The net investment from Insurance companies in the Stock markets was over Rs. 34,000 crores last year (i.e., They received that much money as ULIP premium) whereas this year in the first 3 months, they have invested a net of only around Rs. 3000 crores. More than 50% down than what they invested in a similar timeframe last year.

Per, last years numbers, by the end of March 2011, the insurance companies should have invested Rs. 8000 crores in order to atleast reach the numbers they achieved last year, but unfortunately they are not even 50% close to it.

This is because:
1. A lot of people surrendered their ULIP policies they had invested a few years back
2. People are not willing to buy new ULIPs because the existing ones haven’t lived up to their promises
3. People have started preferring traditional insurance policies rather than ULIPs


I personally have not been a big fan of ULIPs and you might have sensed it, if you are a regular reader of my blog. Even though I am not a big fan, atleast for the benefit of my readers like you, it is my duty to analyze what went wrong for ULIPs. Isn’t it?

What Went Wrong?

Well, the reasons are numerous. Let us look at them one by one…

1. ULIPs are not Magical Investment Instruments

This is true. ULIP is nothing but a combination of Mutual Funds and Traditional Insurance policies. Unfortunately the Agents who sold these ULIPs and the companies that floated them, did not explain the ground reality to their investors. Every insurance agent in town went around with extraordinary projected returns, extrapolated for the next 10 or 15 years. Unfortunately, our Insurance advisors conveniently forgot that the equity market is not an upward moving machine and the equity markets lived up to their reputation. The past 3-4 years have been extremely uncertain and people have realized that, their net investments are not even worth what they invested.

So, people have started surrendering their ULIP policies as soon as the lock-in period of 3 or 5 years are over.

To Meet the Surrender Demand, Insurance companies are forced to sell their holdings or divert the fresh inflows to pay off customers.

This is the biggest reason for their downfall – Promising Unachievable or Impossible Returns to Investors and Failing to Achieve them!!!

2. OverSelling ULIPs

Any product that is over-sold usually goes out of favour in due course of time. When ULIPs were introduced as a revolutionary investment option, every tom dick and harry was selling them and naive investors were buying them just like crazy. And as time went by and the craze started to fall off, the reality struck the investors and because they did not perform as well as they were supposed to, people started selling as well as avoiding them.

3. Profit Involved

ULIPs have been a very profitable instrument for the companies that floated them and the agents that sold them. The same cannot be said about the investors who bought them. ULIPs have the highest commission margin for agents that sold them and the highest expense ratio among equity investment instruments for the Insurance companies. Everyone made merry by selling them while the investors who bought them weren’t having so much fun.

4. Regulatory Concerns

The Equity Market Regulators (SEBI) and Insurance Regulators (IRDA) realized the fact that insurance companies were making a killing by selling these products and by not disclosing all facts concerning them. Investors were even given pamphlets that said how much their money would be worth over the next 5 or 10 years. When the regulators realized this, they started tightening the noose on the rules related to these hybrid investment products and when the free-run was no longer possible, insurance companies had to disclose all concerned facts which made ULIPs less and less desirable among investors

5. Lesser Profits for Agents

Because of heavy competition, insurance cos were forced to reduce their margin on ULIPs. They did so by cutting on the commission they paid to the agents who sold these policies. An agent who used to get upto Rs. 45000 for a policy investment of Rs. 1 lakh by an investor 3 years ago, gets less than 10% of the same today. Making it a not so profitable sale prospect for the agents and eventually the agents are not as excited as they were before to sell them today.

6. The Lock-In Period

ULIPs are long term investment options. They come with a basic lock-in period of 5 years or more. Investors have no choice but to keep investing for 5 or more years even if the ULIP they chose was sinking. Considering the high expenses & fees involved with ULIPs and also considering the fact that the equity markets were choppy, investors realized the fact that, the current value of their investments at the end of 5 years is lesser than what they had actually invested, they started surrendering their investments. This resulted in huge losses for the insurance companies that sold them.

Did Investors Make a Mistake?

If you ask me, the answer is YES. A big YES. It is the responsibility of the investor to perform proper due diligence before locking in money for such long durations (5 years or more) By believing whatever was told to them by the agents, people invested vast sums of their savings into these products and ended up burning their fingers.

After all, every single action we do has a monetary repercussion. People sell things to make a profit and I wouldn't blame the insurance cos or the agents for selling them like pancakes because they were making solid gains by selling them. It was the responsibility of the person who bought it to be careful, when that doesn't happen, people stop buying and that is exactly what has happened!!!

That's it for this article folks…

Happy Investing!!!