2.

2 CASE STUDY ON MIS-SELLING OFULIPS

Cases of ULIPs being mis-sold never cease to amaze us. One such case involved a 55

year old client who was sold a Rs.500, 000 pa premium ULIP by a private sector bank.

Even though we have seen several cases of ULIPs (unit-linked insurance plans) being
sold to the most improbable investors, this case had us completely taken aback. One look
at the facts of the case and we are sure that even our visitors will be left with a similar

feeling
Facts of the case:

1. The client is 55 years old.

2. She does not have a regular source of income, so investing for a regular

Income was her top priority.

3. Her only investments are in fixed deposits (FDs).
4. She will inherit a huge sum of money at the age of 60 years.

. She is not very literate in matters of investment and finance.

6. She is not very liquid (i.e. ha less cash).

In is apparent from the client's age and investment profile thata Rs500,000 ULIP, which

was invested completely in equities, was the last thing she needed. In fact, there was no

reason to recommend anything even remotely risky. While ULIPs could be suitable to

individuals on their risk profile and investment objectives (your financial planner is best

the suitability of a ULIP), in our client's case there was litle scope for a
placed to assess

ULIP to add any significant value to her portfolio, Add to this the fact. that being
relatively iliquid, she could not afford to pay the premiums for the following years.

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Let us examine why ULIPs unsuitable for
were
her.

1. To begin with, she was not explained wat ULIPs are all about; this is not surprising
since a lot of clients know have
we bought ULIPs without appreciating how they can
contribute to their investment/insurance objectives. Given that she was not very well
versed even with the basics of investment and insurance, we believe selling her a

Rs.500,000 ULIP amounted to professional misconduct of the highest order and coming
from a
reputed bank, this is even more alarming.

2. Now selling a ULIP to someone who does not need it is one thing, and selling her a

Rs.500,000 ULIP is another thing that ranks has even more atrocious. We fail to
understand how a Rs.500,000 ULIP could be of any assistance to 5 year old
a
lady, who
has no source of income and who looking to remain invested in
that a low risk avenue

provides a regular until she turns 60 years when her father's sizeable inheritance will

come her way.

3. While ULIPs can add value to the individual's investment/insurance portfolio, two
points are necessary to achieve this; a) the ULIP should be for a long enough tenure and b)

ULIP expenses should be competitive, else for someone who does

need the life cover, not

mutual funds are a better option. It is apparent from our client's details that she did not

qualify on the tenure parameter to justify a ULIP. With a 5 year time from before she
inherited her father's wealth, she just did not have the minimum number of years
necessary to wipe put the heavy initial expenses on the ULIP.

ULIPs incur high expenses (sometimes 60 per

as high as cent of the premiums) in the
initial years; so an investor is not going to earn a (significant) returns on the ULIP in the
initial years until the high expenses are recovered.