Last Month, the new of a helpdesk at an Austrian airport for misguided passenger bound for Australia created ripples on social media. Fact-checking websites went into an overdrive after the news went viral and people began making enquiries, believing it to be true. It turned out there was no such helpdesk; the new was based on a satirical advertisement put up at the Austrian airport and memes on this had gone viral. While the news turned out to be fake, it essayed the influence of advertising and marketing in shaping people’s decisions.
Many a gullible investor have thus been taken for a ride by advertisements that promote inappropriate financial products, including unit-linked insurance plans (Ulips). Take, for instance, the case of Tushar Jejani, 24, who works as a senior financial analyst at a multinational company in Hyderabad. He was approached by his bank’s relationship manager for an upcoming new fund offering (NFO). Since Jejani had known the manager for a long time, he decided to invest ₹75,000 in the NFO, which he presumed to be a mutual fund offering. He was asked to pay ₹75,000 annually for the next five years.
Jajani came to know later that he had been sold an Ulip, something that he did not bargain for. “It was only when I read the policy documents that I realized what the NFO really was,” said Jejani, whose money is still stuck in the insurance-cum- investment plan of the bank’s insurance arm.
To be sure, Ulips combine two products—insurance and investments. The premium amount paid by a policyholder is divided between insurance and investments after first deducting various costs. For instance, there is a mortality charge that is associated with insurance. Insurers deduct all such charges from the premium before investing the balance amount in equity, debt, or hybrid fund categories. So, for every ₹100 paid as premium, about ₹10 goes into the insurance and other costs . The remaining is invested in a Ulip fund from which fund management charges (FMC) are deducted. FMC is capped at 1.35% of the premium amount. The policyholder can switch between the various investment funds offered by the company but cannot port to funds offered by other companies. Each Ulip offers a fixed number of switches that can be done in a year for free.
While Ulips are not pure mutual fund products, a lot of investors do think that it is. This confusion arises when the advertisements put out by insurance companies are loaded with terms generally associated with mutual funds. For instance, when a leading life insurance company launched a Ulip some time ago, it was positioned as a ‘new fund offering’ and mentioned terms such as ‘net asset value’ (NAV). This made the Ulip look like a mutual fund offering. Another insurer’s Ulip advertisement also spoke volumes about Ulip fund schemes. In both cases, the word ‘insurance’ was not used and the mention of ‘life cover’ was hidden in the fine print.
Queries sent to the Advertising Standards Council of India and market regulator Sebi about whether such advertisements violate any rules did not evoke any response.
“There are no restrictions within the framework for insurance companies to introduce NFOs at specific NAVs in the context of Ulips and combination plans. A regulatory conflict between insurance regulator Irdai and Sebi regarding Ulips and hybrid products with an equity component was resolved through an amendment in 2010, but many issues related to investor and policyholder protection remain unresolved. Today, when a conglomerate has both insurance and mutual fund arms, its advertisements can create confusion for investors, especially if they are not well-versed in legal and financial terminology,” said Sumit Agrawal, founder, Regstreet Law Advisors, and a former Sebi officer.
“To avoid any ambiguity, it helps if insurers use distinct nomenclature and an explanatory text to highlight that the product is a unit-linked insurance plan,” said Nirav Karkera, head of research at Fisdom.
The caveats
For starters, Ulips come with different maturities but have a mandatory lock-in period of five years. This means that you cannot access the funds for five years once you buy it. If the policyholder stops paying the premiums, the amount that has accumulated so far is transferred into a ‘discontinued fund’, which yields interest on par with a bank savings account and cannot be accessed till the lock-in period ends. The life cover offered by the insurer as part of the Ulip also lapses when the subscriber stops paying the premium. As for mutual funds, investors can exit these anytime by paying the applicable capital gains tax and exit load, if any.
The reason why many investors prefer mutual funds or fixed deposits is that these financial instruments allow easy exits. Ask Bhupendra Patil, a resident of Gandhinagar, Gujarat, who retired last year at the age of 58. Patil got a lump sum amount of ₹55 lakh through a pension payment order immediately after retirement. He decided to put this in a fixed deposit. When he visited his bank branch, the officials there persuaded him to buy a unit-linked pension product. Patil realized the consequences of this when he went to withdraw money to pay for his 27-year-old son’s college admission at Algoma University, Canada. There was no way he could withdraw his money from the pension product for five years. Left with no option, he had to obtain a loan of ₹20 lakh from another bank.
“In Ulips, you cannot say no to the annual premium payments despite any unforeseen event and there will be a penalty if you miss payments, whereas you don’t have any such restrictions for an SIP with a mutual fund,” said Nitin Balachandani, who runs Insurance Angels, a company that deals with claims. His company helps people who were mis-sold insurance policies get back their money, for a fee.
The pros and cons
Ulips have other disadvantages. Many financial experts have pointed out its lack of sufficient insurance cover. For instance, the life cover amount in Ulips is usually 10-25 times the premium paid. So, if you invest ₹1.2 lakh annually in an Ulip of an insurance firm, you will get a life cover of ₹12 lakh.
Nisha Sanghavi, a certified financial planner and co-founder of Promore Fintech, recommends that life cover should be at least 10 times the annual income earned by an individual. In this case, for someone who is shelling out ₹1.2 lakh as annual premium, a life cover of ₹12 lakh will just not be sufficient. A term insurance policy would be the most suitable product for an investor looking for better insurance coverage. For this, you can avail a life cover of about ₹1 crore by paying ₹700-800 per month .
An important thing to note is that if the investment value grows beyond what the Ulip’s sum assured is at the time of the maturity, most insurers do not pay the sum assured separately. That’s because the policies come with a clause stating that the maximum insurance payout will be the sum assured that includes the investment value. For instance, if the Ulip fund value grows to ₹11.5 lakh, exceeding the sum assured of ₹10 lakh, you will just get the Ulip fund value. So instead of ₹21.5 lakh, you will be entitled to just ₹11.5 lakh.