After the IRDAI brought about changes in regulations, ULIPs saw improved changes. Know what went wrong before this intervention.
What is Mis-selling?
Mis-selling means a deliberate, irresponsible or negligent sale of products or services through misrepresentation of a contract or unsuitability of the product or service as per customers’ needs. For example, selling a life insurance scheme to a person with no dependents.
Here, we are going to discuss the mis-selling of Unit Linked Insurance Plans (ULIPs). This product brought individuals to have a life cover and an investment tool under a single scheme. This product had no separate transactions, intended on building wealth. But, once the private sector entered this market, they started abusing the product. Instead of building wealth, investors started losing wealth and the life cover.
What was Responsible for the Mis-selling?
From the onset, the loopholes in regulatory system of the Insurance Regulatory and Development Authority of India (IRDAI). Also, the private sector insurance companies, agents selling ULIPs and uninformed consumers combined together lead to mis-selling.
Most private sector insurance companies collaborated with big private banks and other financial institutions of an existing good reputation. They decided to join the insurance bandwagon. This move thought to maximise the returns through their existing goodwill. It went wrong for consumers who didn’t know much.
The companies started luring agents by rewarding them with huge commissions on the first-year premiums paid by the insured. This practice led these agents to mislead customers into buying unnecessary and expensive policies. They started marketing ULIPs with phrases like “Pay for 3 years and double your money” this was all in a bid to earn commissions as high as 40% for first-year premiums and 7.5% in the next year and 5% thereafter.
For example, one ULIP had a 100% Premium Allocation Charge (PAC). If the premium was Rs. 1 lakh, the entire amount went to the company (to pay agent commissions). Another had charged 4% administrative charges per month. If the premium was Rs. 1 lakh, a good Rs. 48,000 went as admin charges (to buy envelopes, send couriers). Most investors were not aware of the “free look-up period” of 15 days. This period commenced from the policy initiation date. They could cancel the policy if they don’t like it or changed their minds.
These agents sold these plans more than mutual funds even if they were better suited. This was all in the name of commissions. As per reports from Mint and Goldman Sachs, about Rs. 1.13 trillion invested money dissolved in this scam. They were so wrong in a moral sense, but sort legal covers.
Policyholders should have got better clarity. The terms & conditions printed in small font sizes disallowed a layman to read them. It was in 2010 that the IRDAI brought about regulations safeguarding the policyholder’s interests. This brought down the upfront payouts.
All in all, the conclusion of this is ULIP is a useful product which unfortunately good a negative publicity because of the mis-selling during the initial period. However, because of the new regulations in place, a customer might consider investing in it as a long-term investment strategy.
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