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Opinion

How ULIPs can loot you – A Real Example

I received the following mail from an anonymous commenter that I want to bring to your notice:

I’ve had a very bad experience with Birla Sunlife ULIP. My banker sold it to me without giving complete details of the hidden charges.I am planning to exit my ULIP plan. My annual premium is 70k. SA is 7 lakhs.

I want to bring the hidden charges to the notice of people visting your blog so that they are aware of this and do not get hooked by a smooth sales pitch.

I have pasted the relevant extract from their latest mail below.

At present I am trying to figure out my exit plan. Your views would be helpful.

===============================
We would further like to inform you that from your premium received, we
deduct a loading fee. The policy loading fee is an up-front charge
recovered as a percentage of the Life Insurance Coverage Premium and varies
as per the year in which the payment is made.

The same is 65 % of the base plan premium in the first policy year. This is
due to high administrative expenses in the initial years of the policy, as
we need to recover costs towards commissions, underwriting and other
activities involved with the issuance of the policy.

Further, the loading fees would be only 7.5 % of the base plan premium in
the second and third policy years and 5.0 % from the fourth policy year
onwards.

Apart from the policy loading fee, following policy fees and charges will
be recovered from the policy fund :

1) Charges towards the cost of insurance is deducted by cancellation of
units from the fund at the prevailing unit price on a monthly basis. The
annual insurance charges per thousand face amount for sample ages for
healthy lives are as follows:

Sex\Age (Yrs) 20 30 40 50 60
Female 0.90 1.16 1.66 4.03 10.66
Male 1.02 1.17 2.15 5.53 13.73

2) An investment management fee not exceeding 1.5% p.a. of the fund is
charged by adjustment of daily unit prices. Currently this fee is 1% p.a.

3) The following policy administration fees are deducted by cancellation of
units on a monthly basis :

(a) Rs 22 per month

(b) An annual charge of Rs 2.88 per thousand face amount will be deducted
in the first 10 years of the policy except in the second year where it will
be Rs 15.24 per thousand face amount. From the 11th year onwards this
annual charge will increase subject to a maximum of 3.75% per year.

4) Service Tax @ 10% and 2% as Education Cess (Effective rate of 10.2%) on
the risk premium is levied with effect from June 22, 2005 vide Government
of India Notification No. 11/04-ST dated September 10, 2004. However,
kindly note that the Budget 2006 has increased the service tax from 10% to
12% with education cess remaining the same at 2%. As such, the effective
rate is 12.24% (12% + 2% of 12%).

I think the ULIP is the Birla Sun Life Flexi Life Plan.

The poor bloke has already lost 65% in his first year. And will lose 7.5% to 5% in further years. Plus, he’ll lose Rs. 500 per lakh as admin charges coming to Rs. 3500 per year. In the second year admin charges are special – nearly Rs. 11,000!

To put it in perspective: In year 1, he paid Rs. 70,000. Then he lost Rs. 45,500 as loading charges, Rs. 500 as admin charges. Around Rs. 1000 was paid out as risk premium plus service tax, so the total amount deducted was about 47K, so what is invested is Rs. 23,000.

Second year, he will pay 70,000 and get 7.5% loading (Rs. 5250), Rs. 10,900 as admin charges, Rs. 1000 as risk premium/service tax. That’s a total of about Rs. 17000 – means Rs. 53000 is invested.

In two years, he has paid Rs. 140,000 but only Rs. 76,000 is invested. Even if his invested amount DOUBLES in one year, he just about stands to break even. And what is his sum assured – Rs. 700,000? For a person who can pay Rs. 70 K a year, 7 lakhs is totally insufficient.

Now if this is true, it means they are telling you this:

We have no respect for your money and will try to loot you as much as possible.

Don’t fall for such tricks. Don’t buy ULIPs – specially not this Birla Sunlife ULIP.

As for my commenter – I feel for you. But it is in your best interest to say goodbye to the policy, and assume you have lost 70,000 completely. If you read the “Surrender Charges” and “Premium Discontinuance” clauses, you will find that: Even if you stop paying your premiums after year 1, they have to pay you back the invested amount minus surrender value after three years. Unfortunately, Surrender value if the policy lapses within two years is equal to one years premium (Rs. 70000). So you won’t get back anything.

But that is better than paying one more premium and losing more money.

  • kaho pyare says:

    >This is financial cheating by insurance companies/agents. Reason for this is that all these are not defined clearly in their policies and neither told by agents. Everything is in very ambigious and technical terms and not understandable by laymen.

    Can’nt we go to courts (consumer) or file PIL for these kind of issues. I too hold 2 policies
    AVIVA ulip and pru icici forever life (regular pension). I too feel cheated in both these policies :(.

    PS: Thanks to people like you for creating awareness on the same.

  • Raj says:

    >Hi Deepak,

    this is the wrong place to post this, I’m sure but I couldn’t find any other way to talk communicate. Could you do a piece on the Fortis IPO? Could come in handy for sure..

    Many thanks,

    Raj.

  • Ranjan says:

    >Those who have woken up from their slumber should ask for their money back. There is a 15-30 day period where you can have the money back. Maybe they should try IRDA too.

    But this could be prevented if the buyer cared to ask the right questions.

    Keep the good work going, Deepak.

  • karthik says:

    >Hi Deepak,

    I heard not only ULIPs loot money from people but the endowment policies and other policies in Children Plans also loots the money from people. I heard same for the child specific mutual funds also. Is it true?
    Can you post a topic on this children plans? It will be very useful to all

    Karthik

  • Anonymous says:

    >Deepak,

    Thanks for your comment. I have done some excel numbers and I think I am better off by paying another premium (70k) this year and collecting surrender value of INR 140k less the surrender charges INR 9k at the end of year 3 (next year). To increase my returns (whatever I can salvage) I have spread out the premium payment to monthly payments over this full year. I am also meeting the BSLI folks to make sure that my calculations are corrent before paying this years premium.

    I am adding the tax savings (0.3 * 210k) 70k to the whole calculation so that I feel better about the whole thing 😉

    Thanks for your comments.

    Ofcourse, I’ve lost my complete faith in my MNC banker.

  • Anonymous says:

    >There is always a free look period when you buy insurance policies. one receiving the policy one can return the policy/ cancell it within 15 days

  • Anonymous says:

    >One is not used to reading the entire contracts and fine prints(which is a wrong thing).. Not sure how many of us have read the entire housing loan contract, car loan contract, demat account contract… we rarely do it.. On top of that if your trusted banker slips a nasty product .. you go by what he says..

    Anyway on hindsight its a mistake.. and you need to learn from it. I thought i can share my experience with people so that they dont get trapped.. If they are, they have 15 days to return the product 🙂

  • Deepak Shenoy says:

    >Anon: Please check with BSLI – I think they cut your entire first years premium if you exit after one year or two years. Remember your fund value is only some 23 K now, and if you pay another premium will be totally 70K. (Thye wont refund you the commissions and charges) The 70K is one years premium, which is written in the policy as the surrender charge if lapsed within 24 months.

    Other anon: returning within 15 days is fine, if you read the fine print before then!

  • Anonymous says:

    >http://in.groups.yahoo.com/group/longtermequity/

    Never ever buy anything that is “SOLD” to you, That is why I run groups like this to protect ordinary investors like me form financial advisers.

    In my opinion you should never buy anything except pure term and disability insurance. Buy cashless pure medical insurance too.

    If you mix investment and tax savings with insurance you may get ripped off.

  • Rohit Shah says:

    >Hi Deepak,

    Thanks for your educative posts. I have been considering ULIP investment for some time. It seems that for investment horizon of more than 10 years, ULIP works cheaper then MFs. May be you have already seen the comparison. I can send the excel, if you like. Please let me know your email.

    Regards,
    Rohit Shah

  • Deepak Shenoy says:

    >Rohit: That is only true if ULIP investments perform at the same level as mutual funds. In the last three years, mutual funds have beaten ULIPs by a wide margin, so it negates the margin advantage.

  • Rahul says:

    >I had a similar experience with HDFC Life – same old trick. The agent didnt know what he was selling. I asked him to provide me a sample copy of the policy so I could look at the fine print – he dnaced around it etc etc.
    I finally got suckered into buying it and then a year later found out what the fees were.
    Unbelievable that these scams can exist from such reputed companies.
    There is no realt watchdog government organization that watches these scams in India like the FTC in the US is there?

  • Deepak Shenoy says:

    >Rahul: You can get a FULL and COMPLETE disclosure of costs if you visit http://www.hdfcinsurance.com
    .

    The US has the same misselling problems, believe me. Insurance is a vastly missold product and the agents are simply not qualified enough to sell them.

    All insurers that sell you “investment plans” have something else going on – I guess you’ve had to learn the hard way too.

    I’m not a saint. I hold two “endowment” policies which make ULIPs look like absolute angels in comparison. I bought them because my agent told me how great they were. They give me 6% a year and not enough insurance to sneeze at.

  • Arvind says:

    >I had a similar experience with Bajaj Allianze. My father took the ploicy on my name on the recomendation of a Standard Chartered Bank executive.It was for a premium of 1 lakh per year for 3 years.

    Guess what the unallocated premium is for the 1st year?? 70,000/ !!!! Out of my 1 lakh payment for the first year, 70,000 is eaten up by Bajaj Allianz claiming marketing expense,agent commission,sales expense,etc etc.For the 2nd & 3 year it is about 4-6 %.But apart from that all the other expenses like FMC,Policy admin charge,mortality charge,service charge etc make me wonder if I’ll get away with less than a 40% loss.

  • chsvas says:

    >dear all,wellcome to the blog.
    i am also a ulip agent, so i request all investors to read premium illustration before taking any ulip.AGENTS ALWAYS PUSH MAX. COMMISSION PRODUCTS.
    But if you ask my opinion ulips are for long term only.
    thanks
    chsvja@yahoo co in

  • Anand sharma,ahemdabad says:

    >i bought a lifetime plus policy from Icici prudential through ICICI bank. i was not told about the huge allocation charges which are as high as 25% per year..i have invested 5 lacs and still my fund is lesser than principal invested since 2 years!!!i feel i have been cheated as on the same hand i have invested only 2 lacs with aviva wherein my fund has really grown upto 2.74lacs as allocation rate was 100%..this is really alarming from Icici bank side…

  • Amit says:

    >I agree that ULIPs are pushed by agents, but they are not the ones to be blamed. How many of us know all the insurance products come with a 15 day free look-in period in which if a person is not satisfied with the policy he/she can return it and there will be no deduction during the 15 day period.

    If the policy holder doesn’t read the policy document who is to be blamed.

    I am not defending the agents, all I am saying is even if an agent has sold you a wrong policy isnt it your responsibility to atleast go through your policy document.

    Deepak I would like to have your comments.

  • Deepak Shenoy says:

    >Amit: Does any agent provide a full copy of the policy document before hand? Most companies refuse to do so.

    Also the free look period refund guarantee does not include medical costs. If you don’t like the policy you still have to pay the medical bills. Also they deduct the mortality charges for the number of days you actually kept the policy.

    But I agree: if anyone needs to be blamed in the end, it comes down to the policy holder because they had access to that information but did not read it.

    Most of these cases are even revealed on the web site – companies do tell you exactly how much it will cost. But nobody even bothers to read the online brochure!

    It’s sad that it has to come down to legalese. If agents were more forthcoming about such charges life would be a lot simpler for us all. If companies removed such charges completely and made things clearer, things would be much better.

  • Bhupesh says:

    >I don’t think that ULIP companies or banks are cheaters, it’s upto us what we select!! Sometime back I was also thinking for an ULIP (ICICI)but when I read the ULIP document & calculated various charges I was shocked & immediately dropped the idea even after recommendation of many people. Even if I pay minimum (18K) premium per year I will loose 7-8K per year as various charges & fees, so i thought its better to get some good term plan & rest of money I invested in ELSS. Due to my bad habit of reading everything carefully (even wrapper of potato chips before eating it!!!) which saved me from investing (rather wasting) in ULIP. So please keep your eyes open and read the necessary documents carefully- its better to spend 10 minutes in reading rather than repenting for many years. If your agent is denying to provide details of any scheme please straight forward reject it. Every company & bank provides details of their schemes so please go through it before investing your money.. I wonder that most of us go to 3-4 sabzi waalaas before buying tomatoes of worth Rs 5 only (& we try to bargain on it also!!) THAN why we don’t spend sufficient time before investing thousands & lacs of rupees..

  • Deepak Shenoy says:

    >bhupesh: That’s so true – we spend so little time with investments compared to even buying tomatoes! the problem is actually in the way the product is presented; if the charges are hidden it’s bad, but if it’s not, it’s really our fault for not reading enough.

    But unfortunately, Enron also was a case of not reading enough. Read this
    article
    about how Enron’s sordid details were actually written in their publicly revealed documents (annual report, financial statements etc).

    When you have valuable information buried deep inside documents, the public is harmed. Yet, I don’t believe ulips are dishonest, I simply believe they are overpriced and saddled against the policy holder.

  • krishna says:

    >Hi deepak ,

    Can you pls advise me on this .I have 4 insurance poilcies all from LIC , 2 Jeevan Mitra endowment remium ) , 1 money back( Rs4000 premium) and 1 pension poilicy( Rs 10000) . All of them are 5 -7 years .

    I now understand that I missed out on a pure term insurance policy .

    Is it now worthwhile to cancel existing endowment /moneyback policy and join a ULIP and term policy

  • Citizen Pavan says:

    >Hi,

    Thanks for the discussion on ULIPs. I was thinking of investing in one of them. It was an eyeopener for me

    I would like to know which are the best pure tem insurance policies currently in the market.

  • suman says:

    >Hi all,

    an very informative discussion. Its not right saying tht ULIPS loot you. Its very clearly mentioned tht nearly 70 to 80 percent are loading charges in the 1st year. I think we tend to ignore it as generally such charges r not so high. Its Jst tht we always need to ask whenever kind of charges are mentioned.

  • Gaurav says:

    >Hi all,
    I lately purchased Metlife ULIP plans (Accelorator and Multiplier) with annual premium of 3.5 lacs. Now I had no knowlege on ULIP and was shown such good and assuring side that I asked the executive that all I have is 3.5 Lacs as a lumsum amount and I do not want to pay premiums. He completely agreed to this and told that there is no need to pay premium for second year and third year and we will carry forward your investment as well as your income on investment. Secondly he also hid the charges of upto 40%!!!!! on the amount. I recorded the entire conversation and his ‘too good to be true’ claims in my mobile phone and invested. As expected at last, the policy had exact opposite terms and conditons (most of it which I read here, thanks to you all!). I approached Metlife and now they are delaying the entire thing by saying that submit application and wait for upto 15-30 days and all. I have clear voice recordings of the agent as well as the manager who assured refund. Please help me as to what I can do now……..I don’t want to get into consumer court matters if there is another way out.

    Please help me get my money back. Thanks all!

  • Vinod says:

    >I am also a victim of this cheating by Birla Sunlife. I had subscribed to a Flexi plan on Birla Sunlife in March 2006 and the annual premium is 50K. I have paid a total of Rs. 1,25,142.00 as premium till date. And the shocking news is that my current fund value is around 82K only. I don’t know what type of investment is this. And why the Govt approves all these policies.

    Now I intend to stop paying premiums after completion of 3 years and say good bye to these people.

  • ajay says:

    >My take:

    1. ULIPs are long term investments so be patient
    2. ULIPs returns are governed by business cycles and markets so in the long run there should be an overall growth
    3. lastly, my personal belief is go for term insurance and SIP/MF separately to ensure maximum flexibility and benefits!

  • Mahavir Sancheti says:

    >hi Deepak,
    first of all thanks for sharing such a details on ULIP. i have query HDFC ULIP wealth multipler.
    it is recently lanuched.

    Thanks in Advance.

    Mahavir

  • nitin says:

    >My dear, pl boost ur awareness otherwise u will be in trouble in future also. This way only one can be safe from such temptations.

  • Anonymous says:

    >Thanks for sharing your info on the ULIP's, I too had invested the money 4 yrs back in Birla and the current market value is still less than the Total Investment i had made. now i am taking the money out and investing in a normal MF. The companies had marketed the ULIP to just fund there business and not formaking gains for the customers.

  • Anonymous says:

    >Remember, One buys insurance for risk cover and not for investment. Comparisons with other investment avenues are thus odious. ULIPs are good or bad depending on one's objectives and the understanding of the product.

  • Allan says:

    >Hello Readers,
    Well to give u all a small shock (to a few who don’t know the story behind the screen.

    Most of us feel that the agents (read it as insurance agents or financial advisors) make a lot of commission.
    Infact to be honest, these guys not make anything more than 15-20% (on the higher side).
    They earn only the base commission and that too for the first year only.

    Year 2+ they make only the renewal commission which is very low (nothing more than 5%, it wont last more than 3yrs).

    If you people have lately seen the spurge of Telemarketers calling day in and day out regarding Insurance sales. These guys represent the chunk called Corporate agents.
    These corporate agents are people who make the max of ur invested money.
    the number runs anything between 40%- 70%.
    Reason: apart from the base commission, they get the additional commission called Marketing commission.
    Which means ur hard earned sweat toiled money of Rs.1 Lac when invested, 70k goes to these guys who spent Rs.1/- on calling you and make a Hefty commission charge

    Painful??? but i believe strongly that these people make so much money becoz we have been feeding them, careless enough not to check the charges before buying.

    so every time u guys buy, please beaware…
    CHECK FOR THE CHARGES>

    PS: DECIDE ON WHAT U WANT TO BUY..

  • Anonymous says:

    >We all use to purchase polices from such looting companies as IRDA is involved and we think that IRDA will not allow them to do anything wrong with the common innocent person.

    But I don’t know why IRDA is allowing them to deduct so much of high charges which are between 25% to 50% or even higher to that. And if it is allowing to do so IRDA should also fix responsibility on them that their Fund Managers should manage the funds of their customers such that they should get at least 10% higher profits then that of the charges deducted by these companies.

    But what is happening that these companies are all allowed to deduct the charges in advance according to their wish without any giving the any surety to the customers. And it is very simple once they get the money in advance why will they take pain for the hard earned money of the customers. So IRDA should not allow them to deduct any charge in Advance.
    The charges should be yearly and the end of the year according to the profit earned by the Fund Managers of particular companies.
    As there is some rule to deduct the Income-Tax according to the Income of the the individual there should be some set rule to deduct these charges.

    For example,

    Profit Earned and yearly Maximum Charges
    (including all type of charges)

    profit earned Charges
    ————- ——–
    Less than 10% No charges
    10% to 20 % 10% of the profit
    20 to 30% 20% of profit
    30 to 40% 30% of profit
    40 to 50% 40% of profit
    50% to 60% 50% of profit and so on

    In this way these companies will put pressure on their Fund Managers and they will take maximum pain to earn more and more profit so as increase their charges to maximum limit and customer will also be benefited
    But presently these companies are deducting heavy charges in advance with the approval of IRDA and are given no (ZERO) responsibility then why the company will pay the Fund Managers for growing their customers money. I think they have no Fund Managers at all and the customers has to suffer heavy losses.

    So, I think that we should approach IRDA and it can help to get our money back from these companies with minimum compounded interest of 10% of the invested money as we have already paid heavy charges with IRDA’s approval (25 to 50% or even more) in advance.

  • James Morgan - Puritan Financial Advisor says:

    >I want to bring the hidden charges to the notice of people visting your blog so that they are aware of this and do not get hooked by a smooth sales pitch.

  • pooja says:

    My take on this is:
    Never go for policies which give you 2 or 3 benefits in 1.these are too good to be true policies which benefit only the company and not the investor.
    If you are forced to buy a ULIP which is an insurance cum investment option ask the person to give you information on a pure term policy instead.It is better to insure yourself by term policy and then for investments you can look at other options according to your risk appetite.
    Low risk :Post office schemes like PPF,NSC,RD.
    High Risk: Foreign stocks,Forex Trading,Corporate FDs,High-yield NCDs & Bonds,Penny stocks,portfolio management services,Stock F&O,Commodities