Minimum premium payable

Do you know that there is a term called ‘minimum premium payable’ in any ULIP (Unit Linked Insurance Plan) that you buy from a life insurance company? If you don’t know about this term, please read each word very carefully. If you have a ULIP or plan to buy one in the near future, reading this piece could change your life. Given that we are in the tax planning season and that many advisors would be calling on us constantly, it is more than critical that we precisely understand this special feature of a ULIP policy. It is most likely that your friendly life insurance agent / bank advisor will never tell you about this aspect of the policy. Let’s understand why?

Also let us find out how Mr. Ravi Tiwari (named changed) lost Rs. 24 lakh just like that and when he learnt about it, he felt completely infuriated, vexed, cheated and totally let down by his private banking relationship managers and sales personnel from the leading private life insurance provider from whom he bought this policy.

Here’s how?

Ravi is 32 years old and is a private banking customer of a leading private sector bank. He earns quite well and can be easily classified as amongst those people who are sought after by each and every person wanting to sell a product and earning a fat commission from that sale. For these advisors, their sole objective in life is achievement of their targets – that is all that matters. The only important thing for them is to make fast bucks and cut out huge commission deals for themselves at the cost of naïve individuals like Ravi.

Ravi bought a ULIP policy from a leading life insurance provider. The premium he paid and will pay in years to come is astounding Rs. 3 lakh per annum. This is paid in one shot each year – it is not distributed on a monthly basis. The insurance cover he has is Rs. 15 lakh. So how did the advisors rob him? Well, the economics works like this. When you buy a ULIP policy, there is a charge you pay each year. It is quite steep in the first year and gradually reduces in subsequent years. In Ravi’s case, the charge in the first year was 18% of his premium i.e. Rs. 54,000 was taken away as charges. Now, from the balance Rs. 2.46 lakh, some money would be apportioned towards providing him the life insurance benefit and balance would get invested as per his chosen allocation of 100% equity. This type of arrangement was completely in the interest of the advisors.

Here how things could have been better had the advisors given fair and correct advice:
Mr. Tiwari could have been told that Rs 20,000 was the minimum premium payable and given that he had about Rs 3 lakh to invest the balance Rs. 2.8 lakh could have been deployed into the policy as a top-up. On the basis of this arrangement, he would be charged 20% on his annual premium of Rs 20,000 i.e. Rs 4,000 and 1% on his top-up of Rs 2.8 lakh i.e. Rs. 2800. The total charges in this case would have been Rs 6,800. Against this, he was charged Rs 54,000 because the entire amount was taken to be his premium instead of splitting the amount as premium of Rs 20,000 and top-up of Rs 2.8 lakh.

Now, you can quite clearly see that if the commission paid by the life insurance company is a % of the charges – then the advisors stand to gain based on the charges that you pay. Hence it is in their interest to give you advice whereby their ulterior motive is maximised. Mr. Tiwari would have saved Rs. 47,200 (i.e. difference between Rs. 54,000 and Rs. 6,800). If Mr. Tiwari then invested this Rs. 47,200 for 28 years i.e. upto his age of retirement and if he earned say 15% returns (as he is an equity investor) he would have gained a wealth of Rs. 24 lakh approximately.

This arrangement would have made no difference to his life insurance benefit – given that he is 32 years of age the policy would be absolutely ok. Any insurance company can easily verify this.
Why does this happen? In the insurance industry targets to sales person are given in terms of policies sold and/or FYP (First Years Premium). So the agents have to try their best to get the client to fork out a large sum of money as regular premium. The higher the amount they garner, not only do they achieve their targets but what also follows is hefty bonuses, promotion in ranks of the company which translates into more money and not to mention the fully paid international holidays. All this is at the expense of ordinary people like you and me. And then we are told ‘Buyer Beware’. The question we then come to is - Is their no moral – no ethics – no social responsibility? The insurance company does not care as it stands to gain quite a lot as it gets larger amount of money as charges. The bank does not care as it earns the fat commission and the sales person stands to achieve his target and earn a bonus for himself – all this at the cost of Ravi.

Now if you are the proud owner of a ULIP – go back and check the premium you pay and find out the minimum premium that is payable for your policy. If your advisor tells you that you have done the right thing and that you just need to pay the premium for three years so on and so forth – be warned your charges are very high, the stock markets may crash – your policy can become worthless and because you will not pay the premiums post three years the policy can also lapse in years to come. Three years of premium payment is a marketing tool for advisors to entice you to commit for just three years and they laugh all the way to the bank. It is far better to pay the minimum premium for a minimum of three years and ideally pay it for about 10-15 years – thereafter chances are that you will not need to worry with respect to your insurance benefit.

Having said all of the above the message would be incomplete if we did not mention that ULIP is per say a great product and must be used well for its multitude of advantages. Ravi bought the right product but wrong doings, malpractices of such commission hungry leeches of advisors cost Mr. Tiwari Rs. 24 lakh of potential wealth.