IRDAI Bans Ads That Promote ULIPs As Investment Products. We Had Warned You Before
High commissions, a complex cost structure and bundling with life insurance makes ULIPs a product that one should avoid
Unit Linked Insurance Plans (ULIPs) takes the cake when it comes to the most mis-sold financial product.
Now, the Insurance Regulatory and Development Authority of India (IRDAI) has cracked down on misleading ads insurance companies use to sell ULIPs. It has explicitly stated that ULIPs cannot be marketed as an investment product. We had warned you of the misleading marketing tactics that are used to sell you ULIPs.
What is Wrong With ULIPs
The worst thing about a ULIP is the commission structure and that is exactly why ULIPs are mis-sold.
“The agent's commission was structured in a top-heavy manner. This means if you sell ULIP plans you could get 5 per cent to 40 per cent upfront of the first premium. Compare it with the commission structure of MF (1-1.75 per cent on equity funds on a trailing basis) or low-price NPS (which charges .09 per cent maximum in a year on a trailing basis),” says Madhupam Krishna, Securities and Exchange Board Of India Registered Investment Advisor (SEBI RIA) and Chief Planner, WealthWisher Financial Planner and Advisors.
“Agents, individuals, banks and national brokers made ULIP a category to be sold by its relationship managers. They even went ahead and made incentive slabs and introduced competition among employees. Soon mis-selling started and ULIPs earned a bad reputation,” he adds.
Another reason was the complex bundling of products. Multiple heads of charges like premium allocation charges, policy administration, fund management, mortality, and surrender charges exist in a ULIP. It is difficult to understand the cost structure and returns.
What Should You Do?
ULIPs thus do not make sense when you are investing for a long term goal like retirement. “If you are considering investing in ULIPs (Unit Linked Insurance Plans), be aware that these are insurance-cum-investment plans that offer both life insurance and investment opportunities. The costs are very high, and the funds are a bit more conservative, so the ideal retirement corpus may not be achieved using ULIPs alone,” says Anand K Rathi, Co-Founder of MIRA Money.
From Insurance Perspective: One should not invest in ULIPs if he aims to get adequate insurance coverage. A term plan will be economical in that case and also provide a much larger cover.
From Investment Perspective: When you are making an investment, you look at returns. If you buy a term plan and invest the rest in mutual funds, you will make better returns over the long term, because your costs are much lower. Also, you do not have a five-year lock-in like in ULIP. You can sell your mutual funds when you want to.
Any financial expert who has your interests in mind will tell you a very simple thing- you should never mix insurance with investments. If you do that, you don’t get the best of both worlds as you are made to believe, but you are short changed in both.
