Unit-linked insurance plans (ULIPs) are often mis-sold due to their complex structure and hidden charges, including high premiums, management fees, and lock-in penalties. They combine insurance with investment, which typically results in lower returns than pure mutual funds. Investors are lured by convenience, tax benefits, and aggressive agent pitches driven by high commissions. The lack of transparency and confusing terminology further mislead buyers, many of whom only realise the product's drawbacks when attempting to exit. Financial experts strongly advise against ULIPs, recommending clearer and more flexible investment options instead.
The Great ULIP Mis-Sell: What They Don't Tell You
Since a big part of the premium pays for the insurance cover (and not the investment), and because of various charges, ULIPs typically deliver lower investment returns compared to pure mutual funds
Summary
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Unit-linked insurance Plans (ULIPs) are among the most mis-sold financial products. They come in newer forms and make newer promises, but they are always a bad idea. Mixing insurance with investment is always a bad idea. Any personal finance expert will agree on this.
Why ULIPs Are Not A Good Idea
"ULIPs have multiple hidden charges including premium allocation charges (20-40 per cent in first year), fund management fees (1.35 per cent annually), policy administration charges, and mortality charges that increase with age," says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm. This is why you are most likely to be mis-sold a ULIP product by your agent.
ULIPs also have a five-year lock-in period with surrender penalties, which makes it difficult for policyholders to surrender them before five years. "Mutual funds (other than ELSS & close-ended funds) have no lock-in period; you can redeem investments anytime. Switch schemes, add to your investments, or withdraw partially as needed. This flexibility is rare for ULIPs," says Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors.
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Since a big part of the premium pays for the insurance cover (and not the investment), and because of various charges, ULIPs typically deliver lower investment returns compared to pure mutual funds. The insurance element means that not all your money works for you in the market. "Understanding the numerous fees, as well as the mechanics of both the insurance and investment parts, can be unnecessarily complicated. This lack of transparency makes it hard for most investors to evaluate what they are truly getting," says Krishna.
Why Investors Fall For The Ulip Trap?
Investors prefer ULIPs primarily due to convenience bias, which makes them prefer one-stop solutions. They think fewer options - better it is. They perceive a wrong simplicity of having to carry a single document, talking to a single company, indulging in no or less research, and interacting with fewer vendors. ULIP marketing often highlights tax deductions under Section 80C (under the old tax regime) and the potential for tax-free maturity benefits, making them appear doubly beneficial.
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"Also, high agent commissions (up to 40 per cent) lead to aggressive sales pitches, which, along with other behavioural factors like present bias, such as focus on immediate tax benefits, make them buy these products," says Kumar.
Finally, information asymmetry also plays a role in promoting ULIPs as mutual funds with confusing product names. Many investors only realise they're locked into insurance products when trying to access their funds.
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