Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
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.

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial