ULIP: Robbery in Broad Daylight

5 10 2008


Unit Linked Insurance Plan (ULIP) is one of the most popular insurance products being pushed by the private life insurance companies. The attraction about the product is that it offers life cover in addition to providing attractive returns. In addition, investments in ULIP qualify for Income tax rebates.


Taken in by the triple-offer and the persuasion of a pesty agent, I took ULIP from Aviva Life Insurance in September 2003. It is a whole-life policy with a life cover for Rs 10 lakh. The annual premium is Rs 21,740. I took the option of investing in the growth fund, which means the units will be invested in the equity markets. In the second year, I opted for the indexation offer, by which the life cover was increased by 5% to Rs 10.50 lakh for a higher premium of Rs 22,828.


I have been paying my premiums regularly, as a matter of habit. I receive the policy statements from Aviva every year. I used to casually look at them and file them.


Now, after full five years, I have received the policy statement yesterday. After five years, I have paid Rs 1,13,052 as premium but the fund value stands at Rs 87,206 only. I was taken by surprise that even though the equity markets were doing fairly well, except for the last 8 months, the total fund value was much less than the total premiums paid.


Aviva claims that the fund is being managed well, as is reflected by the NAV. The NAV of the growth fund has gone up from Rs18.39 in Sept 2004 to Rs 27.21 in Sept 2008, a growth of 50 %.  By conventional logic, when NAV is going up, fund value should also go up. But why the fund value has been going down? I’ve discovered that every year, a significant number of units are being deducted from my account. The statement does not mention any expenditure head for deduction of units.


On study of the offer document, I learnt that in the first two years an initial management charge of 5 % was applicable. In the subsequent years an administration charge of Rs 55 per month and a regular management charge of 1% per annum on both initial and accumulation units was applicable.


When I realized that the amount being charged was much higher than the above, I thought of surrendering the policy and asked the company about the surrender value for the above policy. I was informed that I would get no more than Rs 30,000. An exit load of nearly 70%, is unheard of in any investment product. I felt trapped.


If instead, I had just bought a term insurance policy for Rs 10 lakh, I would have paid an annual premium of Rs 4000 only. For five years, I would have incurred Rs 20,000 as premium and I would have been left with Rs 93,052. If I had invested this amount regularly in a Systematic Investment Plan (SIP) with HDFC Sensex Plus  Fund (a diversified equity fund which invests largely in sensex stocks) , this amount would have become Rs 154,714. HDFC Sensex Plus SIP for the last five years have given a return of 17.6% p.a.  


I am convinced that ULIP is a rip-off. AVIVA is not alone. In Deccan Chronicle, Olga Tellis has reported that HDFC Standard Life and Bajaj Allianz charge over 60% as expenses in the first year under their ULIPs and do not disclose the same.


The offer documents of ULIPs lack transparency and do not have the requisite disclosures about the charges. The charges are far too high, in comparison with other comparable investment products like Mutual Funds and Bank Deposits. The high agency commissions and large marketing spends are being recovered in a clandestine manner by the insurance companies.


It is time the insurance regulator, IRDA, reins in these private insurance companies. In the meanwhile, individuals should stay clear of ULIPs. It is advisable to keep the life insurance needs, investment needs and tax-saving needs separate and handle them accordingly.


– G. Mohan




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