Why ULIPs are a misfit for investor portfolio... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why ULIPs are a misfit for investor portfolio... 

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In this issue:
» Luring voters through freebies may come to an end
» Fed failed to estimate the crisis
» Is China cooking economic data?
» How Sahara toyed with compliance laws?
» ...and more!

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Volatile equity markets have seen Unit Linked Insurance Plan (ULIP) redemptions increasing over the last fiscal. ULIPs are basically bundled products that provide benefits of both insurance and investment under a single roof. As the investment return for ULIPs is linked to equity and debt markets in general, redemptions increase when markets fall.

As an example, in FY13, life insurers roughly paid Rs 1,058 bn towards surrender on all types of policies. Out of that 84% of the surrenders/exits pertained to ULIPs! Increasing redemptions and no new fund offers saw the share of ULIPs in product portfolio for insurance companies go down. As a product, it would not be wrong to say that ULIPs have more or less failed.

However, in earlier days, they captured the imagination of most investors. Gross mis-selling and buoyant equity markets saw ULIPs prosper then. However, bundled nature of the product exposed investors to market risk. This meant that ULIPs were for investors with long time horizon and slightly higher risk appetite. But higher commissions earned from selling such products saw agents pushing ULIPs aggressively ignoring risk factors. The higher return bait fleeced quite a few investors. And the ULIP market grew leaps and bounds.

But as equity markets corrected and NAVs declined, investors rushed for exit. This resulted in huge losses. The losses were further compounded by the higher charges embedded in the product. For instance, ULIPs contain a host of charges like administration, management fee etc. All such charges are deducted from the premium payable by investors and the balance amount is invested. Higher charges compared to traditional investment products effectively meant that very little money was eventually devoted towards investment.

In short, ULIP was probably an investment product under the garb of insurance. While it did provide insurance, the decision to buy the product was centred on investment return the product offered. Insurance was only a secondary criterion.

The failure of ULIPs is an important lesson for investors. One should remember that insurance and investment are separate needs. Investments are made to maximize returns. However, insurance is never bought for return but safety. Both have different purpose, time horizon and risk element. Combining both can result in mis-allocation of funds.

Have you been a victim of this "ULIP" mis-selling? What were the lessons you learnt from it? Share your experience in the Equitymaster Club. Or post your comments below.

01:50  Chart of the day
The economic growth is improving. Ironically, the non-food credit growth has remained sluggish as can be seen in today's chart. The non-food credit is bank lending excluding advances to the Food Corporation of India to buy food.

The deceleration in non-food credit growth can be largely attributed to the subdued demand from the corporate sector given the delay in project clearances. Whereas, the food credit off-take remains stronger owing to growth being led by the agriculture sector, which saw a good harvest season. Given the fact that GDP growth stands as a proxy to the systemic credit growth, the continued slowdown in economic activity has depressed the credit off-take for the nation. Additionally, the subdued industrial growth and sticky inflationary scenario coupled with higher interest rate regime have intensified the corporate sector woes thereby hampering the demand for non-food credit.

Therefore, a strong economic revival backed by adequate industrial output growth remains the only trigger to the improvement in non-food credit off-take of the system. Favorable government measures and accommodative monetary policy will go a long way in boosting the non-food credit traction in the economy.

Growth in non food credit

Say you are an employee of a firm and the firm is asking your opinion on who the next CEO should be from a list of about five candidates. You would certainly look at the credentials and the expertise that each of the candidate brings to the table isn't it? Now imagine one of the probables approaches you and promises to promote you to the next level if he's made the CEO? Will there be a temptation on your part to vote for him despite there being other more suitable candidates for the job? Certainly we believe. Perhaps it is for this very reason that the Election Commission of India is about to make a landmark change in its Model Code of Conduct for elections.

The change is nothing but including a guideline that warns political parties to not make tall promises on freebies in their election manifestos. Even if they do, the parties will have to explain the rationale for the same and ways and means of meeting the financial requirements. Now, this is a step worthy of a huge applause we believe. Political parties in India have never been shy of doling out significant freebies in exchange for votes. Even if this meant taking the states' or country's finances back by many years. As a result, this attempt by the commission to create a level playing field will certainly go some way in further strengthening our democracy we reckon.

Fetching accurate economic data on China has always been an impossible task. But the recent contradictions about data emanating from the Oriental economy make even global outlook blurred. China, for several reasons, has an ostentatious role to play in the fate of global economy. It has been the only emerging economy to post a strong show by virtue of its current account surplus. That too when most other emerging market currencies plunged on year on year basis.

However, in recent months investors have been worried about China's ability to weather upcoming liquidity tightening by US Fed. More importantly, the worry about the shadow banks in China has also been on top of investors' minds. As per Fortune, a couple of months back, China actually averted the first default in history by bailing out a large bank. However, at the same time, the reported provision coverage ratios of big banks in China seem enough to cushion the problem of bad debts. Thus it is not just the risk of banking default but also the risk of unreliable information that makes China a riskier investment destination than India perhaps.

Company managements, which wilfully disobey laws, are bound to pay the price sooner or later for such chronic disobedience. At least that is what the Sahara Group management, most notably the boss Mr Subrata Roy, is about to find out. It is now well known that the dubious entity, Sahara Group, has been accused of cheating investors who had put money into the company's bonds. The company had been asked to deposit Rs 240 bn with the market regulator SEBI, which it has failed to do. Meanwhile, repeated attempts by the SEBI to recover this money have proved to be futile as the Group continues to defy laws.

The Supreme Court has now ordered Mr Roy and three of its directors to appear before it in person. The threat being implied that any more tricks from the management will most likely land them in jail. Whether Mr Roy and his cronies finally get their comeuppance remains to be seen. But there is a bigger lesson for investors to learn. And that is not to get swayed or carried away by mouth watering returns while investing money. And to do a thorough research on companies, their fundamentals and their managements before investing in them.

People often believe that policymakers understand the economy better than anyone else. After all, aren't they there because they are so highly qualified? If the world's largest central bank's response to the 2008 credit crisis is anything to go by, policymakers could be as clueless as anyone about what's really going on in the economy.

As per an article in CNN Money, the US Fed grossly underestimated the magnitude of the crisis that was unfolding in 2008. It was only much later that they realised the full extent of the crisis. In that sense, their grand monetary experiment that goes by the sophisticated nomenclature of 'Quantitative Easing' has been nothing more than a dangerous gamble. While Bernanke has left with a seemingly clean track record as the central bank chairman, his policies are set to have far-reaching consequences on the future of not only the US but the entire global economy.

The Indian equity markets remained buoyant. At the time of writing, the benchmark BSE-Sensex was up by 46 points (+0.2%). Capital goods, pharma and auto are the biggest gainers. Majority of the Asian indices are trading in the red with China, Hong Kong and Taiwan markets being the biggest losers. Majority of the European indices have opened the day in the red.

04:50  Today's investing mantra
"I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business"- Warren Buffett
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12 Responses to "Why ULIPs are a misfit for investor portfolio..."


Mar 1, 2014

Dear EM, your assessment is unfortunately not factual at all. I have a ULIP for the past 12 years which has a 50% equity exposure and 50% debt exposure and my IRR is in excess of 15%, unfortunately the Quantum Long Term Equity Fund (QTLEF) also doesn't have such a track record, so we shall see. So please stop rolling or mis-guiding your clients. The fact is for any investment you need time and a goal and the right expenses, the traditional products of LIC and all other insurer's are a complete hogwash but still people buy them as investors dislike volatility and price change, so its the behaviour that needs to change, not ULIP's. They are the best investment vehicle today, better than mutual funds or the QTLEF too.



Feb 27, 2014

The following statement correctly summarizes the whole thing.

"One should remember that insurance and investment are separate needs. Investments are made to maximize returns. However, insurance is never bought for return but safety. Both have different purpose, time horizon and risk element. Combining both can result in mis-allocation of funds."

In 1965 AD I took insurance for Rs. 20,000/- (to mature around 2005 AD) with premium of about Rs. 50/- per month with LIC..

Next year (1966 AD) a general insurance agent explained me how I could get an insurance cover of R. 20,000/- with less than Rs. 10 per month, while the balance Rs. 40/- per month could accumulate to more than Rs. 50,000/- with only bank (CTD or FD) interests. Even with bonus the insurance amount could not reach Rs. 35,000/-

I am happy that it was the last life insurance policy I ever took. I had later (after 1985) taken annual insurance (of LIC itself) for Rs. 50,000/- at a very nominal cost.

One can make such calculations easily by referring to the different tables given in the agents' manual (which many agents are reluctant to show)



Feb 25, 2014

Your assessment (fairly common among financial journalists) is only partly correct. The points to be noted are:
1. There is no harm in combining insurance and investment. Many otherwise sensible people are psychologically incapable of voluntary savings. for them, insurance policies (esp. salary savings schemes) meet two needs simultaneously.
2. As you noted, management charges were very high for ULIPs. Hence, the decks were stacked against the policy holders. Unless the equity markets made extraordinary gains (such gains did not happen), the policy holders would lose.
3. The fund managers, both for ULIPs and equity mutual fund schemes, took the investors for a ride. The types of equity investments made by the managers were all high beta shares which would run up fast only in a rally and thus get the managers a high bonus. It was a case of heads the managers win, tails the investor loses. No wonder the investors have got cheesed off with both ULIPs and equity mutual funds and have surrendered both, en-masse.
This is a sad situation, because the small investor is now out of the equity market, both through the direct investment route and the mutual fund route - and the national economy is all the poorer for it. Surprisingly, nobody has so far thought about the role of the fund managers in these debacles.
3. The rate of return on the annuities issued when the ULIPS mature, is far below the bank deposit rates.


Utpal Datta Chowdhury

Feb 25, 2014

Yes Sir, I am one of the victims of purchasing Wealth Plus of LIC. Each year LIC is deducting their charges from my premium amount Rs. 40,000/-. 1st year Rs. 3688/-, 2nd year Rs. 1086/-, 3rd years, Rs. 1171/-, 4th year Rs.1270/- and so on. LIC have projected the NAV 1st year 10.00, 2nd year 12.20 3rd year 14.88 and 4th year 18.15 and so on. Unfortunately considering the present Equity Market scenario it never cross the NAV 10.50. Presently NAV is 10.4310 or like that. Therefore I think to sold out this policy. Although I have another thinking that if MODI Govt. returns in DELHI Loksobha then the NAV must break out it’s barrier and could go anywhere. In this circumstances I am bit confuse if possible please guide me.
With Regards,
Utpal Datta Chowdhury



Feb 25, 2014

Yes it is correct, ULIP has huge cost involved and not for insurance coverage. But in long term, it pays better return than other MF products with medium risk. As rightly said it is for long term investors who has more surplus funds and to spread in various asset class. Since, it has income tax exemption, the CAGR is around 12 - 14% depends upon the fund manager, it is one of good asset class.


s nair

Feb 25, 2014

Yes, I am a victim .Can we do something with regulatory authorites?.

I t is a fraud on poor people.

s nair


vijay s

Feb 24, 2014

I bought it two times first from ICICI Pru and later (yet again!!) Birlasunlife freedom -58. My experience has gone from bad to worse. Now I don't even talk to the insurance advisers when I visit any bank and do not buy any financial product just because my friend has become an insurance adviser and I can't say no to him.
Hope my experience will help readers to avoid such mistakes.


mahesh k vakharia

Feb 24, 2014

your view on ULIPS r misfit for investor portfolio is not at
all applicable for UTI - ULIP.


Manish Ruparel

Feb 24, 2014

Hi. This is with response to your article dtd Feb 24 on ULIPs. Sorry, but I disagree with yr conclusion. Firstly, u have not studied the product very well. Have u compared it with Traditional products ? I don't think so. It will be appreciable if u do through study, comparison and then draw conclusions. Agents will always sell High commission products only. So, product is not to be blammed. It is mis-selling. Also Tradional products have high charges, no transparency. How r they better ? Can u please enlighten on it ? If you are confident, you will reply to my mail or else will keep quiet.

If this is with insurance, how can we rely on your Equity recommendations ? How can we be rest assured and put money on it ? You will also give a disclosure as per SEBI norms, at the bottom of Recommendationns " All Investments are subject to market risks ......." as face saver ?

Finally, I give you a challenge. U buy a ULIP through me and take any Traditional plan also. Same Term, premium paying term, premiums etc. I assure you will make better returns through ULIP. R u ready for it ?

Manish Ruparel.



Feb 24, 2014

I asked for a FD scheme for my IT exemption under section 80C to one of the Indian Bank Managers. He adviced me to go for an UNIP plan with HDFC, saying that HDFC & Indian Bank have tie-up with each other.
He told the locking period is only 3 years from the date of opening. And that I need to pay only 3 premium payments. He gave me a pamplet showing 14.5% returns. (I still have that pamplet)
So i decided to go for annual premium of Rs. 99,999 starting from Dec 2009. (Thinking that it is a FD plan)
When i received the policy documents i noticed the premium is payable for maximum 15 yrs and minimum for 5 yrs.
So when i asked that Indian bank manager he told me that I need not worry about that and verbally assured me that i need not pay more than 3 premiums for this policy. (He still assured me it is a FD plan, with only 3 yrs locking period)
In Dec 2011 i payed my 3rd premium. (Totaly 3 Lakhs)
In Dec 2012 when i went back to HDFC to close the policy they kept dragging, repeatedly saying that "the market is currently down please wait for another month for the market to come up.
on Oct 2013 i decided to close it no matter how the market is. Only at that time HDFC revealed me that the policy i'm holding
1. Is not a FD.
2. The minimum premium payable is 5
3. As i have payed only 3 premiums i will be charged 15% as surrender charges.
4. The current fund value is only Rs 234000.
5. I cannot sue against them as every thing is mentioned in the policy document. And i have payed 3 premiums (which they take it as a confirmation that i am okey with the terms & coditions of the policy)

I still hold the policy unsurrendered, without knowing wat to do with it, as the current fund value is much lesser than my invested amout and again 15% will be taken as surrender charges from it...

Please advice if you have any solution to get atleast 3Lakhs which i invested...

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