Zerodha Founder Flags ULIPs as a Persistent Retail Money Trap

Every year, millions of Indians hand over their hard-earned savings to products that promise both a safety net and a retirement corpus. And every year, most of them end up with neither.

Zerodha co-founder Nithin Kamath made that case bluntly on X this week, calling out a pattern he finds as predictable as it is expensive: retail investors keep buying unit-linked insurance plans, known as ULIPs, and traditional endowment policies, despite years of warnings and despite living in an era where anyone with a smartphone can check the math in seconds.

“When it comes to personal finance, people somehow keep making the same mistakes over and over again. There’s very little creativity in the mistakes people make,” Kamath wrote. He singled out ULIPs and endowments as the two products that continue to sell steadily even as financial educators, YouTube channels and now AI tools all point to the same conclusion about them.

The core problem with mixing two goals

Here is the issue, put simply. When you buy a ULIP or an endowment plan, one premium funds two separate goals: a life insurance cover and an investment pool. That sounds efficient. In practice, the charges layered into these products, including premium allocation fees, fund management costs and policy administration charges, eat into your returns considerably.

A ULIP investor might earn 8 to 9 percent annually in a rising market. A comparable mutual fund investment in a similar equity category might return 11 to 13 percent over the same period. The gap sounds small. Over 20 years on a monthly investment of ₹5,000, it is the difference between a final corpus of roughly ₹49 lakh and ₹72 lakh. That is ₹23 lakh quietly left on the table.

The insurance cover bundled into ULIPs rarely compensates for that shortfall either. Financial planners consistently argue that a family’s primary income earner needs life cover worth at least 10 to 15 times their annual income. A ULIP’s life cover typically falls well short of that. The investor ends up under-insured and under-invested at the same time.

The standard alternative, one Kamath and most fee-only financial advisors advocate, is to separate the two goals entirely. A plain term insurance policy, which offers a large life cover at a low annual premium, handles protection. Mutual fund SIPs handle the investment. Both stay transparent, low-cost and flexible.

Why are these products still being sold?

If the math is this clear, why are ULIP and endowment sales still growing? Kamath pointed to the central paradox: investors today can do a basic search, watch a comparison video or ask an AI chatbot to show them the numbers, and still choose the worse product.

The answer sits in the distribution model. Insurance agents earn significantly higher commissions on ULIPs and endowment plans than on term policies or mutual funds. A traditional endowment plan can pay an agent 25 to 35 percent of the first-year premium, tapering off later. A term plan pays a fraction of that. The incentive structure pushes products that pay better to the seller, not necessarily the buyer.

Add to this the trusted messenger effect. Many Indians still buy financial products through a family friend, a neighbourhood agent or a bank relationship manager. That relationship carries more weight than the policy document. The pitch is personal; the fine print is not.

Health insurance: where it genuinely gets complicated

Kamath drew a distinction between investment-linked products, where he was unequivocal, and health insurance, where he was more measured. Health insurance, he acknowledged, is harder to evaluate, and the consequences of getting it wrong hit at the worst possible moment.

Most people discover the gaps in their health insurance policy inside a hospital. Room-rent caps are a classic trap. A policy might cover hospitalisation costs but cap the daily room rent at ₹2,000. If a patient takes a room at ₹5,000 per day, which is routine in most urban private hospitals, the insurer proportionally reduces all other reimbursements too. The patient receives a bill far larger than expected despite carrying what they thought was full cover.

Waiting periods cause a similar shock. Most health policies do not cover pre-existing conditions for the first one to four years. Someone who buys a policy at 45, thinking their diabetes or blood pressure medication history is covered, may face the full hospitalisation bill themselves in the early years of the policy.

Co-pay clauses add another layer of surprise. Some policies require the insured to bear 10 to 20 percent of every claim amount. Buyers purchasing affordable policies to save on annual premium often miss this detail until they file a claim.

For a middle-class urban family, one surgical procedure can cost ₹2 to ₹5 lakh. These coverage gaps can erase years of careful savings within days. Kamath acknowledged that unlike with ULIPs, the solution here is not as simple as switching products. It requires reading documents carefully and, ideally, talking to someone who does not earn a commission on the outcome.

What retail investors should actually do

The practical takeaway is not complicated, even if the products being sold are.

Separate life protection from investment entirely. A term plan costing ₹10,000 to ₹15,000 annually can give a healthy 30-year-old ₹1 crore of life cover. That is clean, affordable protection. The investment goes into mutual funds, where charges are regulated, disclosed and substantially lower.

On health insurance, check four things before signing: room-rent limits (choose policies without sub-limits if possible), co-pay percentages, waiting periods for pre-existing conditions and procedure-level sub-limits. These four areas account for the vast majority of claim disputes and out-of-pocket surprises.

If an agent or relationship manager is enthusiastic about a product, ask what their commission is. That is not a rude question. It is the most relevant question. High commissions do not make a product bad, but they explain the pitch.

India’s investing culture is genuinely changing. Systematic investment plan contributions touched record levels earlier this year, reflecting millions of new savers building real, goal-oriented financial habits. The concern is that a meaningful portion of that energy is being directed into products that will deliver disappointment precisely when people need the money most, 15 or 20 years from now.

The repetition of these mistakes, which Kamath finds both predictable and exhausting to watch, suggests that information alone is not the answer. Structural changes, stricter commission disclosure rules, wider availability of fee-only advisors and simpler product design would all help. Until that changes, the old advice holds: read before you sign, compare before you commit, and never let your insurance policy and your investment plan share the same envelope.