How ULIP schemes mislead investors? -- By Amar Pandit

Unless you are the kind who does not watch television, “Bajaj Allianz super agent mujhe apna tax bachchana hai” is an advertisement one can see over and over again, these days.

Given the fact that it is that time of the year when insurance companies hope to get a bulk of their business, this flood of advertising is not surprising. The advertisement emphasises on the time tested cliché of insurance being a tool to save tax rather than a tool to hedge against the risk of dying early.

Likewise the advertising billboards of Mumbai are loaded with Chintamani advertisements with punch lines like ‘don’t just settle for tax planning but also do life planning’.

These advertisements are a part of the misleading sales pitch that most insurance companies and insurance agents make these days to solicit business.

One of our acquaintances Rajesh, who had seen the Chintamani and Bajaj Allianz advertisements, was approached by a private bank to sell him an insurance policy from Bajaj Allianz. The usual sales pitch was made emphasising the following points:

This Unit-linked insurance plan has delivered 40% return in the last few years.

You just have to pay the premium for 3 years and you can exit after 3 years if you want.

You will save tax of around Rs 33,666 if you fall in the highest tax bracket.

We are the number 1 private insurance company in the country.

“What more do you want from a policy? How come I missed this gem” he thought. The same pitch was made to around 30 more of his colleagues who work for a renowned hospital in Mumbai.

Rajesh was recently shocked to see Bajaj Allianz charging around 72 % as premium allocation charge during the first year of policy. What this meant was that only 28% of the amount would be invested. He failed to understand the rationale.

The bank had not told this while selling him the plan. His colleagues had the same experience. They couldn’t figure anything out looking at the statement either because most of the insurance statements are so complex that it would require a higher than normal financial quotient to decipher the charges.

So they innocently shot of a letter to Bajaj Allianz asking for a refund of the 72 %, which they thought was rightfully theirs. Several reminders yielded no response from the insurance company. Finally they managed to speak to someone at Bajaj Allianz. The company shrugged it off and blamed the bank for the mis-selling. Such cases are common where insurance companies often wash their hands off after such bouts of mis-selling and look for scapegoats. This example is essentially a microsm of the whole.

The marketing and selling systems of insurance companies are prone to such messes as insurance agents are incentivised to sell ULIPs by running various contests right from a Free Trip to Dubai to a Toyota Corolla Car. When insurance companies dangle the carrots of paid foreign trips & more money for selling more, the advisory model is likely to take a backseat as the interests of policy buyers are not aligned with the interest of policy sellers. Incentives are a part of any business. But it is one issue if an incentive by an FMCG company makes a retailer sell a different brand of shampoo vis-a-vis mis-selling an insurance policy. Unless insurance companies are penalised for such misgivings, such stories are bound to happen over and over again.

Here is my interpretation of the sales pitches made by insurance companies:

You can exit after 3 years: This does not make sense. The insurance companies typically recover a lot of money in the initial few years of the ULIPs through a very high premium allocation charge. So it takes several years for the investment to just breakeven. Additionally, the agent will sell you more insurance next year because even after buying this policy , you are still underinsured.

We are number 1: I am not too sure what that means. How does it help the individual taking the policy?

And if you hear the tantalizing returns, it means: “Though we say 30-40 % returns, it is only an appreciation in the net asset value (NAV) of the scheme and not the actual returns that you have got”.

A lot of ULIPs buyers still cannot believe they have not made any money despite the unprecedented bullrun in the equity market as insurance companies are smart enough to take out the expenses from the units and not the NAV.

How to avoid these mistakes

Take these ads not with a pinch of salt, but with a truck load of salt.

Your objective for tax planning should be to maximise your post tax income and not just to save taxes. These statements have different meanings and you would do well to understand them.

See if you are maximising investments under Section 80C. If not start with voluntary provident fund, public provident fund, equity linked savings schemes (tax-saving mutual funds) etc in that order of your risk tolerance for investments and opt for term insurance for insurance if you need one.