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Insurance policy holders trapped in ULIPs are still paying the price for products approved by IRDA and then banned in September 2010. Should you continue with the policy based on long-term benefits propagated by the insurance company?
Insurance company spokespersons, their incentivised agents and financial planners have always been saying that while ULIPs (Unit Linked Insurance Plans) don’t offer great returns in the short run, staying with it long term will fetch you great returns. Millions of ULIP buyers are finding out that this is a blatant lie.
How will you feel if your investment gave less than 2% p.a. return on investment after staying with the policy for eight years? Suresh Kumar (name changed), father of the managing director of a Fortune 100 company for Asia-Pacific, approached the Moneylife Insurance Helpline regarding Birla Sun Life Classic Life II ULIP policy purchased in 2005 to cover his son for Rs1 crore. The funds were equally split between equity and debt investment.
He paid a premium of Rs1.82 lakh for five years and paid Rs30,000 for another three years. The account statement shows the total fund value to be Rs9.23 lakh. The total premium payment over the period of eight years was Rs9.98 lakh. Should Mr Kumar still believe in insurance propaganda to keep paying premiums long-term to get benefits? It seems that the insurer is getting benefitted and the insured is trapped in a loss-making proposition.
In the case of Mr Kumar, we have calculated the mortality charges for providing a cover of Rs1 crore and hence the return on the investment, which is different than the return on premium, will give less than 2% p.a. return. Mr Kumar is lucky that the product did not have any surrender charges after completing five years, but some toxic old ULIPs have surrender charges up to the end of policy term.
Many of the Moneylife Insurance Helpline queries are related to similar cases. The insured person is ensnared between the high front loaded charges of an old ULIP and steep surrender charges which prevent them an easy exit. The solace of the insurance product being long-term disciplined savings seems ludicrous with these policyholders who are ready to throw in the towel.
Moneylife’s message of keeping insurance and investment separate seems to resonate with these policyholders, but there is little that can be done for the existing policy unless the surrender charge has come down to zero, based on number of policy years completed.
Even though the Insurance Regulatory and Development Authority (IRDA) has banned old ULIPs since September 2010, what is the recourse for the policyholders who have been already trapped? It is time IRDA takes stock of the situation and offer relief to policyholders who are trapped in products it approved only to be banned later. It is especially true for old ULIPs which continue with atrocious premium allocation, policy administration and surrender charges even after completion of three policy years.
Anita Borges (name changed), an employee of an international NGO, wrote to Moneylife Insurance Helpline on a query about Life Invest ULIP from Max New York Life (now called Max Life). Ms Borges, writes, “On a recent review of the policy statement, I find that from April 2009 till date, I have paid Rs2,08,333 as premium. The current NAV is Rs33.51. The total administrative charge, premium allocation charge, mortality charge and service tax amounts to Rs21,000. I find that I am not benefiting with any increase in the NAV which I am told is due to the share market not doing well. Even if I had invested in a Recurring Deposit (RD), I would have got some amount of interest, whereas in this case, I am losing as the various charges are a huge amount. I would greatly appreciate your advice to me on this so that I can at least get back my money that I have paid without undergoing loss due to the various charges, which were not made clear to me at the time of investment.”
In a ULIP, a policyholder can see the performance and make judgements. But, it is wrong to evaluate returns on premium as the mortality charges need to be excluded. An insurance company is providing the service of risk cover against the mortality charges you pay. In a child plan, there is additional feature provided by the insurer which is Waiver of Premium (WoP) in case of your unfortunate death. Due to this, there are additional charges to provide WoP feature. Just calculating returns on premium paid is inaccurate.
It is not just queries about ULIPs, but also traditional products like endowment, money-back and whole life that have steadily coming to the helpline. People are buying long-term products of 25-30 years and suddenly want to surrender. Traditional products offer low guaranteed surrender value and hence it’s not best option. Read Moneylife cover story (8 March 2012)
Traditional products are opaque on charges which keeps the insured blissfully ignorant about their actual returns. The bonus declared every year is an indication of it to some extent, but many traditional policyholders do not keep track of bonuses. Moreover, the final addition bonus can only be known at the time of maturity.
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