Mis-selling trap – Why ULIPs are not for senior citizens

• ULIPs provide agents with higher commissions in the beginning making it attractive for them.
  
• ULIP costs are front loaded as the majority of charges are levied in the initial five years.
  
• Experts say that exiting from ULIPs after five years is a losing proposition.
  

Kolkata-based Subimal Haldar (name changed), 75, was looking for a safe way to invest money. His insurance agent told him about Unit Linked Savings Plan (ULIPs), saying they're safe like a fixed deposit but also give good returns and insurance coverage. Haldar trusted this and thus invested a considerable sum. However, ULIPs are linked to the market and hence the returns are not guaranteed.

Haldar’s investment was hit during the 2020 market crash and he lost a big part of his savings. Plus, he was not made aware that he could not pull out of his money once he had invested.

Haldar, like many others, has been a victim of mis-selling.

Misselling in investment refers to misleading or deceptive practices used by sellers or advisors when promoting financial products. It involves providing false information, not disclosing risks, or recommending unsuitable products, leading investors to make decisions which are detrimental to their financial well-being.

Why are ULIPs one of the most missold products?

ULIPs provide agents with higher commissions in the beginning, encouraging them to sell new policies. In fact ULIP commissions can be as high as 40% in the first year.

This leads some agents to misinform existing clients, suggesting that their current ULIP has a high net asset value (NAV), urging them to buy a new ULIP with a lower NAV. Not surprisingly, ULIPs are one of the most missold products in the market

The common ULIP sales pitches

The agent or the intermediary who may be an individual or a bank is mostly someone you will trust. Hence it is more likely that people will fall to their sales pitch.

“One of the key pitches is that ULIP is a five-year tax saving instrument as it has a lock-in period of five years. Costs in ULIP are front loaded as majority of charges are levied in initial five years making exiting from it after five years a losing proposition,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.

Another significant selling point is that ULIPs are positioned as on par or possibly superior to bank FDs because they offer insurance coverage and higher returns. What clients aren't explicitly told is that, unlike bank FDs, ULIPs are linked to the market and do not assure guaranteed returns.

Mixing insurance with investment?

While the lure of ULIPs lead to misselling, if one looks at it, the product basically is flawed.

“When you combine insurance and investment you get the worst of both. The cost is higher. If you buy insurance and investment separately it is always cheaper, enables greater flexibility and a greater measurability of performance,” says Dhirendra Kumar, chief executive officer, Value Research, an investment research firm.

When you buy an ULIP you cannot get out and have to stick to it. ULIPs ride on the mental framework that if you invest something, you need to get back something, the same way endowment plans work.

ULIPs and endowment plans are similar. While in endowment plans the return is guaranteed, it happens to be a very low return. ULIPs, on the other hand, are market linked, and a little more transparent, but there are still got all the constraints of an investment where you get stuck.

If you invest in a mutual fund and are not happy with the performance, you can get out of it tomorrow, but in case of an ULIP, you cannot.

Senior citizens: Be extra careful

While the traps of mis-selling may fly thick and fast, if one follows a simple rule, it is easy to stay out of it. “One should not buy any investment policy that is linked with insurance. That is the only way not to be a victim of misseling,” says Kumar of Value Research.

Not surprisingly, like Haldar, senior citizens are often the victim of mis-selling. “Senior citizens should also ask why they should buy life insurance in their post-retirement years as they are not earning any active income during retirement. Also, during retirement, retirees require regular income and ULIP doesn't offer it to them so they should ask about it as well,” says Kumar of SahajMoney.

Even after all this if they buy the ULIP by mistake they can cancel it within 15 days of receipt of the policy documents. It is important to keep relations and emotions away from investment decisions. After all, it is a question of your hard-earned money.