Millions of people have fallen for Unit-linked Insurance Plans (ULIP) that were cleared by the insurance regulator more than a decade ago and promoted aggressively by insurance companies. The industry has been in denial of course and the vast majority of policyholders who have received very low or no increase in their corpus, after faithfully paying premiums for years, have been left voiceless. The problem, of course, was that the high charges that insurers and their intemediaries charged in the beginning, and continued to charge during the ULIP's term. Two years ago, the regulator finally woke up and drastically cut the charges. ULIPs then became much less attractive tp push and indeed, it appears that the Life Insurance Company does not have any ULIPs open as of now, possibly because it cannot charge consumers as blatantly as before.

 

Now comes an interview that gives the game away. In a startling admission, SK Roy, Chairman of LIC said in an interview, “For the net asset value (NAV) to rise by 10% in the fund, the Sensex should rise by 40%, according to some estimates.” Read that again this way: If the Sensex rises by 40%, savers will get 10% of those gains! Where then, will the rest of the Rs30 go? In costs of selling, LIC's adminstrative expenses, gooey ads, agents' commissions and so on. Everybody will make 3 times the money than you the investor, while playing with your money! By the way, these expenses are fixed while your returns are variable. So, if Sensex does not rise by 30%, you start losing money, going by Roy's admission.

 

In the past we have shown how high costs can eat into your returns (Read: ULIPs: A host of costs). The same still seems to be true, Moneylife has shown how poor returns from ULIPs are- Toxic ULIPs: Less than 2% return after 8 years!.

 

In January 2014, when the insurance regulator issued new guidelines for unit-linked insurance plans (ULIPs), some said that returns from ULIPs will improve. The Insurance Regulatory and Development Authority (IRDA) introduced a cap on charges and commissions that could not be front-loaded and had to be evenly distributed throughout the policy term. The lock-in period was also increased from three years to five years. It wasn’t long before media reports started citing high long-term returns along with the benefit of compounding for investments in ULIPs. 

 

The LIC chairman cited the importance of timing to get better returns from ULIPs. When asked by The Hindu Business Line about the launch of new ULIPs he said, “We are faced with a dilemma on when we should launch a ULIP, seeing it from the customer's point of view, and especially looking at the kind of returns the customer is expecting. Ulips have been positioned more as an investment product rather than a life insurance product.”

 

Unfortunately, if the returns are eaten away by high costs, the returns delivered by ULIPs will never meet the expectations of consumers. 

 

Regular readers of Moneylife have avoided such large scale plunder by insurance companies under the legal sacnction of the regulator. They have gone in for term plans which serve their needs best. Premium members of Moneylife Smart Savers, of course, get the best of term plans shortlisted for them along with 10 other great benefits. You can know more about the service here by creating a free account.