Ulips: New-found love of banks

Commissions are driving sales at the cost of customers

MUMBAI: Have you been to a private sector bank lately? Chances are the first thing they will try and sell you is a unit linked insurance plan (Ulip). These are insurance policies which club insurance and investment.
 
The reason behind the interest in selling Ulips is the fact that they help banks make a commission of as high as 20-30 per cent on the premium. “The commission we get on selling a mutual fund is between two and 2.5 per cent, on gold coins it is 8 per cent, but on Ulips the commission is almost 20 per cent. There’s no way we can meet out sales targets by selling mutual funds. I have no option but to get my team to push Ulips all the time,” says a Delhi-based branch head of a leading private sector bank. 

Ulips account for nearly 65-70 per cent of the various investment products we sell,” says a Delhi-based branch head of a leading private sector bank. “Such is the pressure to meet targets that when business is slow, we even get our employees to buy Ulips,” she adds. Industry insiders point out that the situation is not very different in case of foreign banks.

Given the 10 times higher commission (with respect to mutual funds), chances are you might be sold a Ulip as an investment product, which it clearly is not. “A well known bank sold a client’s sister two Ulip policies of Rs2 lakh premium each, on her son’s names. They were not even aware that there is insurance in this product, as they were informed that what they have taken is a good ‘investment product’. When I came to know of this, I asked them if they understood what they have bought. The only thing that they were able to tell me was that it is a good product and will give good returns,” says Suresh Sadagopan, a financial planner who runs Ladder 7 Financial Advisories.

“In fact, a relationship manager at a leading foreign bank pitched a monthly investment product that gives excellent returns. I thought she was talking about a mutual fund. But what she really meant was a Ulip,” says Amar Pandit, financial planner who runs My Financial Advisories.

Individuals tend to get carried away by the sales pitch that banks make because they tend to look at relationship managers as experts. But as Steven D Levitt and Stephen J Dubner write in Freakonomics, A Rogue Economist Explores the Hidden Side of Everything, “…Experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert’s incentives are set up.”

Other than this, in their haste to sell Ulips banks do not point out the high upfront expenses that Ulips have. Depending on which Ulip you choose, the premium allocation charge can vary from anywhere between 15-71 per cent. This means the entire premium is not invested. If a Ulip has a premium allocation charge of 25 per cent in the first year, only 75 per cent of the premium is invested. 

“One investor came to me after a private sector bank had sold him a Ulip that had a cost of around 71 per cent in the first year. There are several people that I have come across who bank with leading private sector banks and foreign banks who have been sold Ulips with a sizeable upfront cost, without being told of the same,” says Pandit.

The mis-selling also stems from the fact that attrition rate in private sector banks is extremely high. “The person can make all sorts of claims and promises while selling. Since people stay with an organisation for just a few months, even wild claims can be made,” says Sadagopan. Industry watchers feel that the insurance regulator has not clamped down hard enough on the mis-selling.

But bankers have a different story to tell. “We don’t mis-sell. A customer needs both insurance and mutual funds. They are not replaceable: both are sold independently. If the selling is need-based then there is no mis-selling” says KVS Manian, group head, retail liabilities and branch banking, Kotak Mahindra. Maninder Singh Juneja, general manager, liabilities, ICICI Bank says “There is a balance of both insurance and mutual funds. There are wealth managers in the bank, who try and do risk profiling of a client.”

Manian adds “Though the bank has the necessary certification to sell insurance and mutual fund, we don’t allow employees who are not certified, to sell. We follow this in spirit and not just on paper. If an untrained employee clinches a customer, he is not paid the incentive or the commission for selling the policy.”

Another way through which banks mis-sell is by telling individuals that an Ulip is just a three year policy, when it is not. Ulips have a cover continuance option, which the individual can opt for at the time of taking the policy. This option essentially ensures that even if the individual is not able to continue paying premiums anytime after the first three years’ premiums, the policy continues. This has been turned this into a selling point, giving an impression to individuals that they have an option to stop paying premiums after three years, which is really not the case.

Now the question is why is it done? The commission that banks earn on Ulips is high in the first two years, after that it tapers down. So it is in the interest of the banks that after three years, the individual buys a new Ulip so that can make a higher commission again. An investor who decides to stop paying premium after three years hardly benefits; after three years, the expenses are less and more of the premium gets invested.

Some insurance companies are making an effort to control mis-selling. “We have seen that even though the policy is for 20 years, agents say that people can discontinue paying the premium after 3 years. For this, if a customer calls for a surrender or withdrawal of policy, we have a discussion with him to find the reason behind the surrender,” says Deepak Satwalekar, managing director and CEO of HDFC Standard Life Insurance. A similar question to ICICI Prudential Life Insurance, the largest private sector insurance company remained unanswered.

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