ULIP: A decent concept gone wrong

ULIP. Just utter this term in front of a bank’s investment friendly customer and more often than not you will end up getting responses like “I have burnt my hands earlier; I do not wish to repeat the same mistake again”. Such is the terror of ULIP in a lot of customer’s minds, that regardless of the regularizations and how much transparent the Advisor might be, the customer would not budge from his stance of choosing NOT to invest in a ULIP based on the impact of the term alone!

So, what really led to this stain on ULIP that just refuses to go away? Well, it goes a long back way dating back to 2005 when ULIPs had been newly privatized and all private Life Insurance players had started coming up with their variants of ULIPs. However, due to heavy commissions and the flexibility that ULIPs used to offer, agents resorted to mis-selling the products in order to fatten their pocket and thus began the journey of ULIP becoming the most financially abused product with pitches like “money will be doubled in 5 years”, “unlike a term insurance, here you get the returns” etc.

It was only in 2010, that the IRDA got into the picture to set things right with ULIP, but by then the impression had already been formed and it was not such a good one. With no regularization on the charges, companies were able to provide insane commissions to the agents, which was cut short by IRDA as it announced that any ULIP in its entire policy term should not able to charge beyond net 2.25% Post this, the commissions reduced and thus industry gradually moved to selling more of traditional and endowment products.

However, the positioning of ULIP is still mis-sold by the representatives who are selling it. While the concept of heavy returns may or may not be there, it is now being positioned as a product that a customer can consider investing in for a period of 5 years. Now, that is officially correct, but the fact that people are not told that the benefit for them actually lies in completing the policy term is where things go awry. Most of the ULIP plans sold require recurring payment for 5 years or more, and for as long as the payment occurs, the Premium Allocation Charge is also charged which is the major charge among all other charges. While rest charges continue to be levied, there are loyalty additions and certain other boosters imbibed in the product to enhance the Fund Value thus sort of covering up for the charges.

Let’s consider that a ULIP product has a 5-year payment term, so the 1st premium stays invested for 5 years before the lock in period is over, 2nd premium for 4 years, 3rd premium for 3 years, 4th premium for 2 years and last premium for only 1 year. Assuming that you were looking for an investment with a horizon of five years, and you wish to withdraw in 6th year, you will in most circumstances end up getting a marginal gain on your capital if not break even. The problem here is not with the product, but with how the product was positioned as a “5-year investment”. The amount paid every year needs time to grow without ignoring the fact that certain charges were being adjusted from it. A Common investor would withdraw his money, once this lock-in period completes in order to avoid making any further “losses”, but in actual this is where he makes the loss-making decision for himself.

Before investing, what is it that an investor really seeks from his investment? The answer is transparency. And ULIP is easily among the most transparent product that is out there with its Benefit Illustration at 4% and 8% shared with the prospective clients and even printed in policy document for reference, but representatives do not delve into that as they feel it might scare the investor or become too complex and thus conveniently sell ULIPs based on good fund performance and the fact that it can be withdrawn any time after 5 years, ignoring the charges and how 5 years is not an ideal tenure for it.

ULIP is a good concept gone awry thanks to the rampant abuse of the product as a quick sell. The main USPs are always used while selling the product but barely acted upon once the representative has sold the product. The flexibility of switching between equity to hybrid to debt funds in real time, the flexibility to do so without bearing any exit load, the concept of Loyalty Additions and Wealth Booster as well as the option of Partial Withdrawal without having to bear any exit cost or lose the life cover is what makes ULIP an attractive and beneficial proposition provided it is utilized effectively.

Specifically, in the current age ULIP has also undergone major transformation with certain online versions, or variants that do not charge Premium allocation, policy admin and / or mortality charges or either reverse them on maturity.

ULIPs, if utilized the right way and for the right tenure can earn decent to handsome returns. If a customer can go for a PPF which has a tenure of 15 years, people should be ready to hold on to ULIPs for 15 years as well to reap the entire benefits rather than panicking and withdrawing money at the first instance they get after seeing minimal returns. ULIP is not something an investor should look at from an insurance perspective but as an opportunity to earn decent returns staying invested in the market for the ideal tenure.