Look out for these Ulip traps

The recent Allahabad High Court decision pulling up SBI Life for the plight of 72-year-old Virendra Pal Kapoor, whose ‘investment’ of Rs50,000 shrunk to Rs248 in five years, has brought into focus mis-selling in life insurance once again. The case pertains to a pre-2010, high-cost Ulip. The Insurance Regulatory and Development Authority (IRDA) had, in 2010, imposed caps on unit-linked insurance plans (Ulip) charges. However, policyholders can still get stuck with unsuitable policies if they do not understand the fine print.

Buying life insurance when you are in your 50s and 60s

Individuals in the higher age brackets do not need protection cover as they are unlikely to have dependents. “Applicable mortality charges also eat into the investment component of the premium. Buy life insurance only if you need it,” says Pankaj Mathpal, CFP and founder, Optima Money Managers.

Keep an eye out for high charges

In case of some Ulips, total annual charges could be around 10-15% in the first five years, depending on the policyholder’s age. This could translate into very little, assuming a return of 12-13% on equity fund options. Surrendering such policies in five or six years could result in a loss. Insurers argue that Ulips necessitate staying invested over the long term to reap rewards.

Be wary of ‘attractive’ returns

Some traditional endowment products promise guaranteed additions of 8-9% for each completed policy year, paid at maturity. “ This could mislead customers. The guaranteed benefits are calculated on a simple interest rather than compound interest basis. The actual returns are much lower,” says Mathpal.