First things first:
- This is going to be a long post. Even if you haven’t invested in ULIPS, I’d recommend reading along.
- The post also assumes that you’re familiar with basic financial terminology. If not, order a copy of the book Smart Money Moves. It teaches a lifetime of valuable learning, for the price of a bad pizza meal. It’s the follow up to the highly rated Grownups Are Just Kids With Money. If you’re not big on reading, you can attend the upcoming live edition of The Moneyplanting Program.
What are ULIPs?
ULIPs are insurance+investment products. They were designed from the get go to strip wealth off of hard-working individuals. In case of senior citizens, they were also used as an effective way to siphon away their life’s savings.
I’m not being too harsh.
Take a look at these headlines. They’re all about ULIPS.
ULIPS were widely marketed, heavily mis-sold, and their complicated structure meant that agents could easily bury clients in a sea of jargon, numbers and timeframes.
There were only one set of folks for who ULIPS created tremendous wealth. The one’s selling it. This group includes insurance agents, bank’s relationship managers, financial advisors and insurance companies.
So why this post now?
One of the program attendees mentioned having signed up for a ULIP a year ago. She was also mis-sold stating.
- That a ULIP is exactly like a mutual fund.
- But it was better, because it also provided an insurance cover.
- And that she wasn’t paying premiums but SIP installments.
Calling ULIP premiums as SIPs, and stating that ULIPs are exactly like mutual funds, is clearly one of the newer mis-selling tricks which agents are employing. But that comes as no surprise since ULIPS were always, always mis-sold.
A quick google search of the phrase ULIP mis-selling will show these results.
What’s a ULIP ANYWAY?
It’s an abbreviation for ‘Unit Linked Insurance Policy‘. Let’s break that phrase down.
Why the words Unit Linked?
Because unlike a traditional life insurance policy, where you are assured a certain percentage of return (typically around 4-6%), in ULIPS you are allotted units which are market-linked. The growth of your investment depends on the growth of these units. These units are linked to Equity or Debt.
What does A ULIP provide?
It provides a mix of both insurance and investment.
That might sound like a good thing(You’re getting both in the same product after all). But it isn’t.
When it comes to investing or financial planning, insurance and investment should never be mixed. This statement is true for any investment+insurance product; not just ULIPS. That includes a myriad of other investment+insurance products with different names.
- Whole life insurance plans
- Pension plans
- Moneyback plans
- Children’s plans
- Women’s plans
- Endowment plans
The industry comes up with new and creative ways year after year to sell these terrible products.
Investing in them makes no sense
Because when you mix your insurance and investment needs, you get the worst of both worlds.– everybody who knows about finances
This has been stated plenty of times both in the book and in the program.
Instead of investing in a ULIP, you’ll get better results if YOu:
Invest a portion of it to buy a term insurance life policy. Because that would provide a far higher insurance cover than a ULIP. A ULIP typical provides around 10 times of your annual premium as insurance cover. So for a policy where you’re investing 50,000/- a year, you get an insurance cover of a measly 5,00,000/-.
Is 5,00,000/- enough for your dependents to live comfortably for a decade? Absolutely not. But that is what a life insurance cover is supposed to do. It’s supposed to provide a financial cushion to let your family get things back in order.
Your life insurance cover should be at least 10-20 times your annual income. And if you’re a 30 year individual in reasonable health, you can pick up a term insurance life cover of 1 Crore Rupees, for 8000/- to 10,000/- Rupees a year. (A year, yes)
Invest the rest via an SIP into an equity mutual fund. The remaining 40,000/- to 42,000/- can then be invested into a multi-cap fund, via an SIP. Because that will provide far higher growth than a ULIP. And in you don’t want to expose all of it to equities, you could pick an equity-aggressive fund instead.
Here’s a slide from the program. It assumes a conservative return from a multi-cap fund over a 5 year period.
What else is wrong with ULIPS?
The lack of flexibility
Your money in open-ended mutual funds is never locked up(unless in the case of tax-saving mutual funds). But most ULIPS lock your money up for 5 whole years. There are absolutely no withdrawals allowed during these initial years.
Mutual funds on the other hand allow complete flexibility. If a fund from one AMC goes on to perform poorly in comparison to its peers for several years, you can switch to another fund, from another AMC.
ULIPS still have a massive list of fees and charges. Besides the premium allocation charge which could be as high as 6% in the first year, this post on Policybazaar lists 11 different kind of fees which are levied. This is no way a recommendation of Policybazaar and its articles. They are also insurance middlemen and have a lot to gain from selling products.
A ULIP agent will tell you a myriad of options that you could exercise – that you could top-up insurance, change investing strategy, surrender, withdraw, change premium payment frequency etc. But most of those can’t be done for free.
Because of all these charges, the amount of money that actually ends up working for you – is often lesser than what you are investing. The rest works for the middlemen – the insurance agents and the distributors.
The lack of transparency
The transparency in mutual funds in shockingly high. You can find out a fund’s performance history since its launch, changes in its fund management, a list of the stocks an equity fund invests in, changes in its stock and asset portfolio etc.
Most ULIPS on other hand provide very little or no transparency. Every ULIP product is different from another, and any attempt to compare two policies is an exercise in vain.
ULIPS are complicated AF
It isn’t that ULIPS are simple products which are easy to understand. They’re far more complicated than what a term insurance and mutual fund can ever be. Nothing is straightforward and every action is accompanied by a fee, or a timeline constraint.
But people fall for them because they expect a financial product to be complicated. The truth however is that all the good financial instruments, are shockingly simple.
A recent ULIP advertises itself as ‘Non-Participating, individual, regular & limited premium Unit-Linked endowment plan’ and provide 8 different types of investing strategies.
Do they expect someone who knows little about finances to understand that? Of course they don’t. That’s what makes it easier to sell them. There’s plenty of jargon, and plenty of conditions on every option available to confuse even an otherwise keen individual.
What can you do if you’ve already invested in ULIPs?
Since you’re reading this blog, I am going to assume that you’re keen to learn about finances, and if not now, you’ll soon know enough about mutual funds and other critical financial fundamentals.
In which case, I can safely say that if you are investing for the long term, you are better off exiting the policy as soon as possible. You may have to bear losses by doing so, and its likely that what you’ll end up getting an amount lesser than what you’ve put in.
But doing so will at least ensure your future investments go towards highly efficient products like term life insurance policies and mutual funds. You’ll end up having a better insurance cover, your money will be able to grow at a better rate, and you’ll have better flexibility to invest based on your needs and goals.
The cost of not exiting a ULIP, is that you’ll continue to put your money in a sub-par, commission-loaded product for several more years – may be even decades.
How can you go about exiting your ULIPs?
If you’ve just signed up for a ULIP
All policies are mandated to provide a free-look period. This is usually about 15 to 30 days. Within this timeframe, you can cancel your ULIP and recover whatever’s been paid.
If you’re beyond the free-look period
I can right away guarantee that this won’t be easy. Your agent will try and convince you to continue the policy in every which way possible. Because when you don’t pay premiums, he/she stands to lose a lot. You may have to study your ULIP offer document in painful detail, call their customer service helpline several times, and may even have to visit their office in person. You’ll basically need to look for the least damaging way to exit the policy. You’ll either surrender it, or convert it to a ‘paid up’ policy.
Bear in mind again that all of this assumes that you’ll soon pick up a term life insurance policy and go on to invest in well rated mutual funds. Value Research is a good place to start that search.
Here’s how you can do a good deed today.
The prime targets of high-commission product peddling insurance agents are young folks (since they’ll invest in anything which will help them save taxes), and elder parents and grandparents (because its far too easy to get them to trust you).
So the best thing you could do is send a link to this post to anyone in your circles who could be susceptible. Share it on your feed, and you’ll do a lot more good. You can help dozens, if not hundreds from making similarly grave financial mistakes.
Until the next time, Happy Moneyplanting.
P.S: I’ve started reading Haikus.
O snailKobayashi Isa
Climb Mount Fuji,
But slowly, slowly!