Everyone knows that mis-selling of ULIP policies as “investment options” without informing people about upfront mortality and summary charges that would be deducted, as well as forfeiture norms if you do not pay for the min # of years, was one of the biggest scams pulled off on the unsuspecting middle class in India. Millions of people thought they were investing into tax free mutual funds, without reading the fine print, and simply got cheated. In fact I was once witness to a sad scene in a so called multinational insurance firm’s office, where an old couple who were obviously on hard times, came with a clutch of papers. Their neighbor had asked them to invest in a ULIP policy and they had paid 15,000/- per year for 2 years. After which they could not afford to pay any more and stopped. One could see that they were literally scared to step into that office and talk to a tie sporting jock behind the “help desk”. It felt really bad to see them asking how much their 30,000/- was worth, and being told that it was worth exactly zero, because they had not paid premiums for the mandatory period of 3 years, and hence it had lapsed. Their entire money was gone! They just looked dazed, and said the obvious thing; “but nobody told us”! You can imagine the “help desk” person’s response 🙁
That’s the bad news. What happened thereafter is that the IRDA came down on these robber barons like a ton of bricks. Agent commissions which were as high as 40% of your premium in the first year were slashed and it was made incumbent on the insurance firms to educate customers clearly about their policies etc. Overnight this money making business crumbled and insurance firms found themselves having to sell directly, often online, because commissions became so low that the agents who were earlier pushing ULIPs like mad would not touch them now. Net result of course, is that those unfortunate enough to hold ULIPs suddenly found that nobody was interested in servicing them as customers any more. There was no more money to be made from them and the commissions as well as mortality charges had been already deducted. So they were a burden at best. Both for the Insurance firm as well as the agents handling them.
Now comes the coup de grace! It just boggles the mind that unscrupulous agents would find another way to milk the victims a second time around! But that’s exactly what seems to be happening now. I had read about this scam and experienced it first hand today!
It starts with identification of ULIP policies where people have paid the min 3 yrs and then stopped paying premiums. In reality within the 3 years, they have already paid most of the mortality charges upfront and legally they now have the option to either continue paying the annual premiums, or to give a notice to the insurance firm, to convert their ULIP into an automatic cover mode*. What this means is that they don’t pay any more premiums, but their life cover continues for the 10 or 15 years that the plan was for. This is actually the smartest thing to do, because in most cases you have already paid for the 15 years life cover. Asking them to close the ULIP only releases them from the cover that you have already paid for. Whatever fraction of your money was put into equity of debt continues to appreciate, and the small annual maintenance charges (typically a few 100 rs.) get debited from your fund value. But guess what? The insurance firm does not like it, because you aren’t paying any more premiums. And the agents don’t like it because they arent making any more commissions.
Here is where the brand new scam comes in! Somehow your contact and policy details makes it ways to a new set of shady sales agents. Typically a call comes in from Gurgaon, claiming to be an employee of the insurance firm itself. And the scamster starts telling you that your policy has lapsed because you have not been paying premiums etc. In my case, the scamster then tells me to talk to the “area manager” of said MNC insurance firm for more details. I call the guy and he says look, you paid 60 grand in premiums, but the fund value is only 52 grand now, after all charges were deducted. Its better you close this policy now, in which case you can get back 52K + a loyalty bonus of 42 grand. We can ask head office in Delhi to consider this and call you for the required procedure. In my head the math was not adding up, but I was confused by then and say ok. An hour later, “Sheetal” calls me and says “it seems you want to close your policy”? And I say no, I just want to convert it into automatic mode. But I would also like to confirm this so called “bonus” that my fund has accrued? This lady now proceeds to aggressively sell to me that my current policy is really no good. You can already see that your 60 grand is only 52, hence returns are negative (sic!). This is all because it was invested in the equity market, which is a very risky place. It’s likely that my fund will not appreciate at all in the future etc. I am by now thoroughly confused as to why the insurance firm is trying to get me to close my policy and politely tell the lady I have a fair amount of experience with equity markets, so she need not worry for me. Can she please confirm what is my fund value now and what is this bonus business. Now the game starts getting tense with her tersely saying that if I want to risk my money in the equity market she cant help me any further! And I go… err… bonus? And she comes up with the wild theory that the 42 grand bonus would be available to me only if I shut down my current policy and invest the proceeds + an extra 25 grand into a New Fund Offer!
That’s when it struck me as to what this scam was. None of these people were likely to be employees of the insurance firm. They were 3rd party sales agents putting the fear of God into existing ULIP holders and trying to get them to close their policies and transfer their investments into other higher commission instruments, whereby they could get nice new business commissions and the unsuspecting policy holders would get a fresh haircut, all over again! Suddenly it made sense as to why there was a crying baby in the background while speaking to the “area manager” and why an MNC firm employee could manage no English and kept slipping into Haryanvi accented Hindi.
What angered me the most was the sheer audacity of trying to cheat people twice, and the fact that they were essentially targeting those vulnerable people who were struggling to manage small investments with limited knowledge. I am sure an industrialist like Uday Kotak or KM Birla does not get such a call. No siree… the call goes out the retired schoolteacher and the average hassled employee. People whom they can catch off guard easily.
So the objective of this post is to inform and hopefully protect at least some ULIP investors from this scam. If anyone calls you, claiming to be from the insurance firm and tries to get you to wind up your policy, don’t listen to them. Go to the branch office of the firm in your city and ask them for real facts and data. You may spend 2 hours doing so, but hey… its your money!
* Note : If 3 years of premiums have been paid, ULIP policies typically offer a window of 2 years from date of last payment, within which you can choose to convert your policy into auto cover mode. After that if they do not hear from you, they will close the policy and pay out the fund value. If you still don’t turn up at the branch after they have closed your policy, your money will sleep. It may not earn any interest. So the worst thing to do with a ULIP is to simply stop paying premiums, not give an instruction to convert into auto mode and not turn up at the branch for years, assuming your money must be earning interest!
** Terms tend to vary between specific plans.. pls check!
Thanks a ton for this article Menon, I got a call from my agent with similar offer last week, just that I was busy asked them to contact later.
bloody fellows.. looks like it is happening all over the place then 🙁
not necessarily… if your mortality and commission charges have already been deducted, then future payments become more or less like a mutual fund. So if the fund is performing well, it may still be ok. Its usually the first 3 years where most of the damage happens 🙂 Best to check the breakup
Very informative Sandy. Didnt know this piece. Thanks.