What factors are responsible for ULIP mis-selling? - Miss-sold ULIP case study
Being mis-sold an insurance policy is an unfortunate yet plausible reality in India, particularly when it comes to ULIPs. This practice is commonly seen as involving forgery, fraud, or deception to some degree, with an innocent buyer at the end of it. To explain mis-selling of ULIPs better, let's dig into what insurance mis-selling is, how policies can be mis-sold, and tips to avoid this.
What is Mis-selling?
The reckless, careless, and intentional sale of services or items via contract deception or product unsuitability for a customer’s needs are defined as mis-selling. Although all types of insurance policies can be mis-sold, it has so been the case that ULIPs have taken the brunt of the beating. Unit linked insurance plans give you the benefits of a life insurance coverage alongside market-linked investments making them an attractive addition to a financial portfolio. However, not everybody, in every scenario, needs ULIPs. To further detail how ULIP plans can be mis-sold, let's address which factors of the plan impact whether or not people will erroneously purchase a ULIP.
What are the factors that are responsible for Mis-selling of ULIP Plans?
Here’s a case study about an unfortunate client who was mis-sold an expensive ULIP plan. A 55-year-old woman with no regular source of income and only fixed deposits as her investments without adequate financial literacy was sold a ULIP of ₹5,00,000. What’s wrong with this picture? The client will inherit a large corpus at the age of 60 but has less liquid funds at her disposal. The ULIP that was sold to the client was invested completely in equity instruments.
It is apparent from the age, and financial situation of the client, that investing in anything remotely risky is unwise. Yet, the client was advised to invest in equities through a ULIP as it would be valuable to her portfolio. In any case, tailoring the investment to the needs of the individual is essential, and in this case, with little wiggle room around market-linked investments, investing in low risk with guaranteed returns instruments as per her financial situation would’ve been appropriate for the woman.
With her portfolio being highly illiquid, the woman was unable to continue paying her premiums over the following years. Hence, there was little scope for her to add ULIPs to her portfolio which was only solidified by this outcome. To breakdown why ULIPs were not suited to the needs of this client, consider this:
1. No explanation regarding what ULIPs do and their inherent risks were provided: Professional misconduct involves not giving your clients as much information as they need regarding where their money will go. By not telling the client in the case study the extent of her coverage, the cost of her life cover, and most importantly, the risks involved with market-linked investments, the concerned agent has committed a mis-sale.
2. The client was sold an exorbitant amount: Selling a ULIP to someone who should priorities savings is suspect but selling a ULIP worth ₹5 lakhs to an individual with little financial literacy is also not correct.. For an individual with no direct stream of income at the age of 55, investing in market-linked instruments that will fluctuate is strongly not advised. The priority at this stage should be low-risk savings instruments.
3. The benefits yielded were marginal: To add to this, with most market-linked investments, incurring an expected rate of return may take years of investing. In the initial years, the investment is still growing, while compounding invisibly works its magic. Hence, it is unlikely that this client would have seen profitable returns from the market for just 5 years. Additionally, the woman lost out on capital as she was unfit to pay her premiums for the ULIP by her second year. In short, while ULIP plans are definitely a suitable investment avenue, they are suitable for the long term.
Before investing in any insurance policy, some good housekeeping looks like:
- Choosing an insurance provider with a trusted client base and a good reputation in the industry.
- Assessing your financial situation and whether the policy adds more value to your life than it takes away.
- Reading the terms and conditions of your policy document carefully.
- Getting a second or third opinion from a financial adviser or a financially literate friend or relative.
With any kind of investment, there is a right and wrong time to commit to it. The same applies to ULIPs. The intention of ULIP plans is to serve as a protective yet market-oriented instrument to give customers the best of both worlds. To make the most of your investments, and steer clear of insurance mis-selling, practice financial housekeeping habits and learn as much as possible about these instruments in your own time. Take a look at the range of options by Bajaj Allianz Life Insurance to find an insurance policy that can suit to your needs.
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