ULIP woes: How a senior citizen lost 90% of his premiums after staying invested for 14 years
A ULIP in 2007. But the insurer cancelled the policy.
Pay him one-tenth of the total amount he had invested until then.
The message said the company had terminate his unit-linked insurance policy (ULIP) – Life Invest Unit-linked Investment 10-pay plan.
The problem was, he had invested Rs 5 lakh in the policy.
What really happened?
In the year 2007, Rajasekhar bought two unit-linked insurance policy (Ulip).
By paying a monthly premium of close to Rs 4,000 each in both these policies.
The policies, which came with sum assured of Rs 12.5 lakh, were to mature in 2032 and 2033.
They were limit premium–paying policies, so the premium paying period ended in 2017.
Under the terminated policy, for which he received just Rs 50,000.
He had paid total premiums of Rs 5 lakh.
the Insurance Regulatory and Development Authority of India (IRDAI).
And predictability, his insurance agent who had (mis)sold him the policy, didn’t help.
The older ULIPs – issued before the 2010 reforms –
That allow insurance companies to terminate the policies if the fund value fell below a particular threshold.
Whatever remain, was return to policyholders.
This is the route Max Life took, according to Rajasekhar’s complaint to the IRDAI.
The policy was terminate as the fund value had dip below the annual premium.
The real culprit: Mortality charges in ULIPs
The mortality charges in Rajasekhar’s policy add up to Rs 4.95 lakh when it was cancelled.
His death benefit – Rs 12.5 lakh – was 25 times his annual premium.
Rajasekhar says he was not aware of this charge and how it could hit his policy at a later date.
He only mentioned the amount he wanted to invest and the agent took the rest of the calls.
A mortality charge is the cost of the risk cover, that is, protection cover that will pay out the claim to your dependents.
It is link to your age, age-group’s life expectancy, death benefit and fund value, among other things.
The older you are, higher the charges.
The policy prematurely, but the high mortality charges took a large bite out of his residual corpus.
Present-day ULIPs usually offer a cover of ten times the annual premium.
For instance, a 49-year-old buying Online Savings Plan ULIP (balance fund option) with.
A death benefit of Rs 5 lakh will be charge Rs 8,471 as mortality charge, assuming 8 percent gross yield.
In Rajasekhar’s case, higher sum assured also contributed to higher mortality charges.
Fewer tangles in new-age ULIPs
Others might not be as fortunate as Rajasekhar.
Mis-selling has been a menace in life insurance.
One that persists despite multiple regulations to curb such malpractices by the IRDAI. Unfair business practices.
Which include mis-selling, made up 26 percent of complaints received in 2019-20.
To rein in cases of mis-selling, the regulator imposed caps on Ulip charges in 2010.
Which brought down premium allocation charges and, therefore, commissions paid to distributors, among other things.
The reforms have indeed made Ulips relatively more policyholder-friendly.
Also, 2015 onwards, life insurers have introduce low-cost online Ulips that have done away with premium allocation charges.
Understand ULIP workings before taking the plunge
But even reformed Ulips lack the flexibility to redeem units if the fund’s performance is lackluster.
Switch to another company’s Ulip, unlike mutual funds.
The five-year lock-in period means that you can withdraw your money only after it ends.
Those who are likely to need the funds in 5-10 should tread carefully.
Moreover, while new-age online ULIPs have trimmed most of their charges.
The ceiling on charges does not apply to mortality charges.
What should policyholders do?
People in the older age-groups, who are unlikely to have dependents.
Need to be especially careful while buying any policy that promises attractive returns, tax benefits.
‘free’ insurance. “Ask yourself about the purpose of making the purchase.
If you are looking for an insurance cover, term insurance is your best bet.
If the objective is wealth creation, then you can look at mutual funds.
Read the policy documents yourself, even if they are voluminous.
Many make the mistake of leaving the crucial task of filling up forms to the insurance agent.
Likewise, do not treat post-purchase verification calls from life insurance companies –
Make to ensure that the product has not been mis-sold – as mere bureaucratic processes.
If you realise that the policy is not suitable, you can surrender it within the 15-30-day free-look period.
“Don’t listen to the sales pitch of the agent or bank and purchase such policies.
Understand the premium commitment, minimum number of years for premium payment.
Exit route in case of non-performance etc.