Is ULIP Right investment: How a senior citizen lost 90% of his premiums even actively invested for 14 years in ULIP//

A xxx life insurance policy holder had bought a ULIP in 2007. But the insurer called the policy and paid him only 10% of the total amount he had invested untill then.

In May, Mumbai-based 63 years old (name not to specify), got a text message from xxx Life Insurance. The message said the company had terminated his Unit Linked Insurance Policy (ULIP). Scheme name - Life Invest Unit Linked Investment 10 year pay plan. It returned him only Rs. 50,006. The problem was, he had invested Rs. 5 lakh in this policy.

What really happened?
In the year 2007, Senior citizen bought two Unit Linked Insurance Policy (ULIP) from xxx Life Insurance company, by paying a monthly premium of close to Rs 4,000 each in both these policies. The policies, which came with sum assured of Rs 12.5 lakh, were to mature in 2032 and 2033. They were limited premium–paying policies, so the premium paying period ended in 2017. Under the terminated policy, for which he received just Rs. 50,006, he had paid total premiums of Rs. 5 lakh.

At first, xxx Life customer care executives told him the cancellation was a result of his surrender request. He said: “I had never made one", who also complained to the Insurance Regulatory and Development Authority of India (IRDAI). His insurance agent who had (mis)sold him the policy, didn't help. Finvin Financial Planners explains that there was a clause in some of the older ULIPs – issued before the 2010 reforms – that allowed insurance companies to terminate the policies if the fund value fell below a particular threshold. Whatever remained, was returned to policyholders. This is the route xxx Life took, according to Senior citizen's complaint to the IRDAI. The policy was terminated as the fund value had dipped below the annual premium.
Explains: Mortality charges in ULIPs
The mortality charges in senior citizen's policy added up to Rs 4.95 lakh when it was cancelled. His death benefit – Rs 12.5 lakh – was 25 times his annual premium. Senior citizen says he was not aware of this charge and didn't expect it could hit his policy at a later date. He only mentioned the amount he wanted to invest and the agent took the rest of the calls.
A mortality charge is the cost of the risk cover, that is, protection cover that will pay out the claim to your dependents. It is linked to your age, age-group's life expectancy, death benefit and fund value, among other things. The older you are, higher the charges. xxx insurance company may have terminated the policy prematurely, but the high mortality charges took a large bite out of his residual corpus. Present day ULIPs usually offer a cover of ten times the annual premium. For instance, a 49 year old buying xxx Life insurance's Online Savings Plan ULIP (balanced fund option) with a death benefit of Rs 5 lakh will be charged Rs 8,471 as mortality charge, assuming 8 percent gross yield. In this senior citizen's case, higher sum assured also contributed to higher mortality charges.
Senior citizen feels that he could salvage his investment as he complained to the IRDAI. xxx Life Insurance agreed to refund the premiums collected on both the policies, along with 6 percent interest for the entire period. He has recently received Rs 7.62 lakh each for both his Ulip policies against cumulative premiums of Rs 5.04 lakh that he had paid per plan.
While arriving at this arrangement, however, xxx Life insurance made it clear that senior citizen had access to all the information about the policy and yet chose to buy the policy. “As you are aware, under unit linked policies, mortality charges get deducted in accordance with the terms of the policy contract. Due to your prevailing health condition at the time, extra loading charges were imposed as a percentage over the mortality/morbidity charges that were to be deducted from the premium itself. It will not be out of place to state that the said extra loading charges were duly accepted by way of signed counter offer by you and only upon your acceptance of the counter offer, the above policies were issued”. Citizen had diabetes and hypertension at the time of buying the policy, which pushed up his mortality charges. Yet, the refund was being processed as a “Good will gesture”, considering his “age and health conditions,” the company wrote in its communication saying: "they reiterated that the matter had received an amicable closure". We have settled this particular claim in an amicable manner with the customer. At xxx Life Insurance, we take customer grievances at the highest priority and remain committed to resolving any issues in a timely and efficient manner. 

Fewer tangles in new age ULIP's
Others might not be as fortunate as this senior citizen. Misselling has been a menace in life insurance and one that persists despite multiple regulations to curb such malpractices by the IRDAI. Unfair business practices, which include misselling, statistical results received in 2019-20 came out to be 26 percent of complaints is regarding the same. To reinvestigate in cases of misselling, the regulator imposed caps on Ulip charges in 2010, which brought down premium allocation charges and, therefore, commissions paid to distributors, among other things. The reforms have indeed made Ulips relatively more friendly to policyholder's. Also, 2015 onwards, life insurers have introduced low cost online Ulips that have done away with premium allocation charges.
Understand ULIP workings before taking the plunge
But even reformed Ulips lack the flexibility to redeem units if the fund's performance is lacklustre and switch to another company's Ulip, unlike mutual funds. The five-year lock-in period means that you can withdraw your money only after it ends. Those who are likely to need the funds in 5-10 should read carefully.
Moreover, while new-age online ULIPs have trimmed most of their charges, the ceiling on charges does not apply to mortality charges.

What should policy holders do?
People in the older age groups who are unlikely to have dependents, need to be especially careful while buying any policy that promises attractive returns, tax benefits and free insurance. “Ask yourself about the purpose of making the purchase. If you are looking for an insurance cover, term insurance is your best bet. If the objective is wealth creation, then you can look at mutual funds”, says LadderUp Wealth Management.
Read the policy documents yourself, even if they are voluminous. Many make the mistake of leaving the crucial task of filling up forms to the insurance agent. Likewise, do not treat post purchase verification calls received from life insurance companies made to ensure that the product has not been missold as mere bureaucratic processes. If you realise that the policy is not suitable, you can surrender it within the 15-30 day free look period. “Don't listen to the sales pitch of the agent or bank and purchase such policies. Understand the premium commitment, minimum number of years for premium payment, exit route in case of non-performance etc..."

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