Ok.. This is a bit of a personal vent out and a lot of education for like minded souls.. or rather should I call myself an educated illiterate. I guess the latter sounds more appropriate after having gone through one of the worst realizations of my financial stupidity.
I never was and now, NEVER WILL BE, a big fan of ULIPs. Personally, I believe that this is a product designed to swindle out money from investors in the garb of returns. Damn it, I fell for it 😦
I have had experience with 3 different fund houses namely LIC, ICICI and Bajaj Allianz in terms of ULIPs at different points of time over the span of last 6 years. In general, I consider myself a financially literate individual taking pains to understand the nitty-gritties of all financial products around. From the onset, I never had a good feeling about ULIP, but considered it to be an educating experience. Little did I know, that it would turn out to be a horror story, a costly one at that.
I had surrendered a ICICI ULIP (after 4 years), Fortune Plus and Money Plus from LIC after their lock-in periods without much hassles and in general, could recover my investment. Do note the phrase, recover, as in ULIPs that would seem to be the appropriate expectation. Atleast for me it is.
I had to take a Bajaj Allianz Unit Gain Policy due to familial pressure (hurts when one of your stupid cousins is an agent too). Anyways, I studied the policy (based on the available literature in terms of brochures, ads, available info on internet) and after some deliberation, took a policy in my wife’s name.
Lesson No. 1: Don’t take a policy from any agent especially your relative if they don’t intend to invest into the same. If they don’t understand the policy or inherent risks, you will be in a soup and hence, better avoid this option completely.
When we went to surrender the policy after the mandatory 3 years, we were in for a shock. The policy will be canceled ONLY after the deduction of a surrender penalty, which is
Surrender Penalty = (1 – (1/1.10) ^ N) * First Years Premium,
where N is the total policy duration minus number of years you have been investing into.
If you have a 10 year policy (as in UnitGain case) and wish to withdraw after 3 year period, N comes around to be 7 which means that 48.68% of my first year’s premium will be deducted. That’s roughly one half of an yearly premium that I have paid from POST-TAX Money.
Hence, if one considers the overall scenario, following would be the lost opportunities or to be precise, cost of lost opportunities:
- First year premium allocation charge which is very steep – 40-50%
- Yearly premium allocation charges
- Mortality charges if one has opted for a life insurance as well – Though insurance cover is pathetic, typically being 5x annual premium
- Monthly administrative charges
Atleast the aforementioned are those which I could locate easily. God only knows what else is deducted. Unless one tracks online every month, these deduction of units go highly unnoticed
Figure this: You loose money due to all those charges mentioned plus you loose money when you surrender plus you can’t claim a loss in tax. Hence, its a typical loss-loss situation. This is extremely poor customer empathy and I guess there is a greater need for regulation in ULIP sector.
Ok, the standard response is that all these information in Bond/Policy document which I personally feel 99% of us don’t read. This information is not available in pamphlets or brochures or similar advertising stuff. One has a 30 day period within which you can read the document and surrender the policy with a Rs. 100 fine. Ok, if the policy document reaches you before this period is over. I figured that my document came almost at the end of the window or rather outside of it. What do I stand to gain?
ULIPs have been an unorganized sector with lot of companies just mimicking or copying policies without any end gain for the customers. Capitalism thrives on profit making for share holders, but not at the cost of the common people. Yes, you need to be profitable, but not at the cost of a common man loosing his hard-earned money. Imagine when a decently read individual like yours truly can felt cheated, how about a common man?
I feel the following are in order and outline the urgent needs of the day:
- Watchdog like SEBI or AMF or somewhat similar structure to control this sector
- All ULIPs to have a sample representation of all varied cases for any individual – Not just notional returns
- Need for greater emphasis on the market linked risks (read post script below) – Common man’s appetite may not match the risk
- Need for better educated Agents (including my cousin)
- Better facilities like online redemption, seamless linking of disbursements to bank accounts through Net transfer
- Dematerialized documents for online transaction
- Last but definitely not the least – Better products with emphasis on value creation to customer along with being profitable
Lesson 2: Don’t invest in ULIPs unless you understand the product completely, have the risk appetite and are crazy enough to take the plunge.
Postscript: I was in the Bajaj Allianz office for 1.5 hours and figured that atleast 10 people were there with redemption on mind. A few gentlemen who faced this reality like us were apparently shell shocked, flabbergasted and were very upset. C’mon who won’t be…. when their hard earned money is lost. A few other individuals came across as ignorant of market risks. All they could ask is, why is that you are telling my fund value is 21,000 when I have paid 30,000. This clearly defines the lack of awareness and education among the common people, some of whom would have taken the policy because one of their friends recommended it or happens to be an agent.
At the end of this ordeal, all I can feel is FRUSTRATED