In May, Mumbai-based S Rajasekhar (name changed), 63, got a text message from Max Life Insurance. The message said the company had terminated his unit-linked insurance policy (ULIP) – Life Invest Unit-linked Investment 10-pay plan. It paid him Rs 50,006. The problem was, he had invested Rs 5 lakh in the policy.
What really happened?
In the year 2007, Rajasekhar bought two unit-linked insurance policy (Ulip), both from Max Life Insurance, 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 50,000, he had paid total premiums of Rs 5 lakh.
At first, Max Life customer care executives told him the cancellation was a result of his surrender request. “I had never made one,” says Rajasekhar, who also complained to the Insurance Regulatory and Development Authority of India (IRDAI). And predictability, his insurance agent who had (mis)sold him the policy, didn’t help.
Melvin Joseph of 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 Max Life took, according to Rajasekhar’s complaint to the IRDAI. The policy was terminated as the fund value had dipped below the annual premium.
The real culprit: Mortality charges in ULIPs
The mortality charges in Rajasekhar’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. Rajasekhar says he was not aware of this charge and how 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. Max Life 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 Max Life’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 Rajasekhar’s case, higher sum assured also contributed to higher mortality charges.
Rajasekhar feels that he could salvage his investment as he complained to the IRDAI. Max 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, Max Life made it clear that Rajasekhar 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,” notes Max Life’s email, of which Moneycontrol has seen a copy, to Rajasekhar. He 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 “goodwill gesture”, considering his “age and health conditions,” the company wrote in its communication.
When Moneycontrol contacted Max Life Insurance for their response, they reiterated that the matter had received an amicable closure. “We have settled this particular claim in an amicable manner with the customer. At Max Life Insurance, we take customer grievances at the highest priority and remain committed to resolving any issues in a timely and efficient manner,” the company said in an emailed response to Moneycontrol’s queries.
Fewer tangles in new-age ULIPs
Others might not be as fortunate as Rajasekhar. Mis-selling 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 mis-selling, made up 26 percent of complaints received in 2019-20. To rein in cases of mis-selling, 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 policyholder-friendly. 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 tread 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 policyholders 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 Raghavendra Nath, Managing Director, 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 from life insurance companies – made to ensure that the product has not been mis-sold – 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,” advises Joseph.