The role played by insurance advisors or agents (as they have been conventionally referred to) has been put under the scanner in recent times. The biggest contributor for this has been the mis-selling in the ULIPs segment. Conventionally an insurance advisor’s role was limited to helping his client select the right insurance policy, picking up the premium payments and arranging for receipt of the maturity proceeds. However ULIPs require a far greater degree of expertise and participation from the advisor. Sadly, experience suggests that advisors have been found wanting on both counts and more often than not, ULIPs have been sold for the wrong reasons

In this article we discuss some of the wrong premises for selling ULIPs.

1. Ignoring the insured’s risk appetite

Insurance advisors are known to be quite trigger-happy while suggesting ULIPs to insurance seekers and in the process have shown disregard for the latter’s risk profile and need. Often the advisor’s income becomes the key point in recommending a product rather than the client’s need. For example an individual with a low risk appetite whose insurance needs can be covered by a term plan might be sold an ULIP which invests its entire corpus in equities.

Similarly an individual whose investment portfolio comprises of equities and equity-oriented mutual funds could do with a conventional product like a term plan or endowment plan; the same would ensure that his investment and insurance portfolios are diversified across asset classes.

2. Not revealing the expenses

The expense structure for ULIPs tends to be a very complex one and varies across insurers, different offerings i.e. equity plans, debt plans and others. Usually the expenses tend to be higher in the initial years (can range from 20% to 60% of the premium) and taper down during the subsequent period. Higher expenses translate into a lower amount being invested which in turn means a smaller corpus is created during the first few years. Insurance advisors often fail to reveal these facts to ULIP investors resulting in the latter not being aware of his true financial standing.

3. Positioning ULIPs as a short-term avenue

Insurance advisors are known to entice investors by positioning ULIPs as investment avenues for the short-term. This practice is especially prevalent for selling equity plans when attractive returns are promised over short-term horizons. Advisors flaunt the surrender value clause to convince investors of their investment’s liquidity. However investors are almost never informed of facts like liquidating the ULIP investment during the initial years (generally the first 3 years) entails receiving the surrender value at a discount i.e. investors are penalised for prematurely liquidating ULIP.

4. Encouraging non-payment of premiums

The flexibility in premium payments is often used by advisors as a ploy to sell ULIPs. Unlike conventional insurance products wherein non-payments of premiums could result in the policy becoming lapsed; ULIPs continue to be in existence so long as size of the corpus doesn’t fall below the stipulated minimum amount. However the insurance company deducts mortality charges and other mandatory deductions from the investor’s existing corpus. Hence a default in paying premiums results in a loss for the investor albeit it seems like the former is an inconsequential event. Again insurance advisors rarely bother to inform their clients about the flip side of not paying premiums.

Listed above were some of the ‘techniques’ deployed by advisors for peddling ULIPs; however this list is far from exhaustive. So how should investors counter this problem? The solution perhaps lies in the law of ‘caveat emptor’ (let the buyer beware). Investors need to equip themselves with better information and be aware of the investment they are undertaking. Instead of relying only on the advisor, investors can scan through the insurance company’s sales literature, financial websites and newspapers to become well-versed with the investment avenue.

Rest assured, if your investment advisor only paints a rosy picture with all factors pointing in favour of an ULIP investment, he has probably failed to present the true picture!