If you have a couple of hours to spare, walk into a bank that sells insurance (or just call your broker or insurance agent) and say you want to buy an insurance policy. If we were not opposed to gambling, we are willing to bet huge sums that you will be firmly guided towards a Ulip. The more ethical brokers and agents might tell you that they are suggesting you to invest in a unit-linked insurance plan. Others will not bother going so far and will just tell you that you get more returns, or worse, that you get free insurance with a mutual fund product.

Flexibility, growth, security—that’s what the agent swears Ulips deliver. Which is a fair enough premise. Ulips do make sound investment sense, provided you know exactly what you’re paying for and what you’re getting. Things turn really sour when these insurance plans are sold to the elderly or are sold on false pretences. Other agents might conveniently forget to tell you about the steep policy administration charges. Also, most people who take Ulips do not know—and have not been told—that although insurance cover will remain in force even if you stop paying premiums after three years, the insurance company will start deducting mortality charges from the corpus for as long as the policy is in effect.

M Nagesh, 36 Bengaluru   The case He wanted to save tax under Section 80C and was told to invest in LIC’s Profit Plus. The agent told him returns wou ld be approximately 200% in about three years. So Nagesh invested Rs 50,000 in October 2007 The mis-selling The agent did not tell him about the market risks involved, nor did he tell him about the initial charges The mistake Nagesh had his doubts but instead of getting them clarified, was swayed by the promise of doubling his investment and saving tax The damage After the initial charges and the market crash, the value of his investment is down to about Rs 40,000 80% of the life insurance policies sold in the past two years have been ulips

So, the policyholder still has to pay for the insurance cover. M Nagesh was not particular about insurance; he wanted a tax-saving plan. His agent pushed him to invest in LIC’s Profit Plus Ulip, without mentioning the market risks involved. “He told me that LIC is a big organisation owned by the government so it will not fail,” says Nagesh. What he did not tell Nagesh was that even the government cannot control a market crash—and that a crash would instantly affect the value of his units. Nagesh invested Rs 50,000 in October 2007. The market crashed subsequently and his investment today is worth just about Rs 40,000.

In the past two years, almost 80% of the life insurance policies sold in the country have been Ulips. How much of this is because of hardselling and how much because of mis-selling is anybody’s guess. When it comes to Ulips, there’s a potentially deadly mix of mis-selling, ignorance and greed at work. Make sure you know what you’re getting into and don’t let your agent sweet-talk you into signing away your retirement fund. If the agent does not tell you about the high administration charges, if he ignores the entire issue of market risk, or if he does not explain how the insurance cover works, he’s mis-selling.

The good news is that the regulator seems to be on the ball. Last year, the Insurance Regulatory and Development Authority released a note on its web site, cautioning “members of the public not to get carried away by unapproved sales presentations being circulated in the market”. However, as is evident from Nagesh’s experience, these steps are not enough to rein in crooked agents.

It is hardselling if the sales agent... • Tells you how Ulips create wealth in the long term by investing in equities • Shows how well a Ulip has performed in the past few years • Tells how investors can benefit from switches between debt and equity • Says a Ulip's fund management charge is lower than a fund?fs expense ratio • Points out that investment in a Ulip has a lock-in period of only 3 years • Tells you the life cover continues even if you stop premiums after some years • Points out that Ulips also gives you insurance cover

But it is mis-selling if he ... • Does not tell you that your investment can go down if markets fall • Projects similar returns in future. Projections of over 10% violate rules • Does not tell you that this amounts to timing the market • Does not reveal the 25-30% policy administration charges in initial years • Encourages you to withdraw after 3 years to re-invest in another Ulip • Does not tell that mortality charges are deducted from fund in such cases • Does not clarify if nominee gets sum assured or corpus value or both

Questions to ask before investing in a Ulip

1. What are the administration charges on the policy?
2. How much of the premium goes into paying the commission?
3. What percentage of the premium is invested?
4. How has this Ulip performed compared to the best diversified equity fund or ELSS plan in the past 1-3 years?
5. Has the illustration of projected returns shown to me been approved by the insurance company?