The Insurance Regulatory and Development Authority is at it again! And the target once again is ULIPs (unit-linked insurance policies).
According to a business daily, IRDA has expressed concerns over the early exit option given by some life insurance companies to their ULIP policyholders.
IRDA's primary concern was that ULIPs were life insurance policies, and per se, should be treated as long-term contracts. They are unlike mutual funds, which 'could' be viewed from a short-term perspective.
Therefore, giving an option of withdrawal after just 2-3 years would be absurd. IRDA is contemplating allowing policyholders to withdraw only a part of their contribution towards ULIPs in the initial years.
And that too only in case of an emergency; with a penalty charge factored in. In effect, it would deal with the fact that expenses on ULIPs were on the higher side in the initial years and therefore, the exit option would hardly prove to be beneficial for the investors.
ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premiums in market-linked instruments like stocks, corporate bonds and government securities.
But unlike a mutual fund, the charges incurred on ULIPs by insurance companies are higher. This is primarily due to mortality charges being levied as well as the high commissions paid by life insurance companies to their agents/advisors/consultants.
While a life insurance agent gets as much as 25%-30% upfront in the first year itself if he sells a ULIP, the commission earned by a mutual fund agent/distributor (on equity funds) is usually around the 1.50%-2.00% mark. And that's not where the comparison ends; the trail commission on ULIPs is around 5% p.a. in most cases whereas in a mutual fund, the trail commission is around 0.50%-0.75% p.a. Obviously, the high commission expenses are recovered by insurance companies from the policyholder, i.e. individuals.
This affects ULIP returns. IRDA has also raised apprehensions about the said charges and indicated that life insurers should consider reducing them so that the effective returns on ULIPs are more in tune with reality.
It has also been generally observed that ULIP sales materialise by harping on the 'higher returns' that they are able to generate vis-à-vis their traditional 'endowment type' counterparts. One reason for this is the comparatively lower life cover component and a sizable portion going into market-linked instruments.
But if returns were to be the primary criterion, then it would defeat the basic purpose of buying an insurance plan.
Why not, instead, buy a term plan and invest the rest of the money in mutual funds to generate the so-called 'returns'? Why pay commission to insurance agents and diminish one's 'investible surplus'?
And if tax breaks were to be the criterion, like they have so often been in the past with life insurance, then tax saving funds, also known as equity-linked saving schemes (ELSS), could be considered.
ELSS schemes offer identical ULIP-like benefits as far as tax sops are concerned. ULIPs, to that extent, are an anomaly in themselves.
So does all this talk mean the end of the road for ULIPs? Quite the contrary.
Fact of the matter is, ULIPs, as an investment avenue, have gained in popularity over the last couple of years. This avenue is especially meant for individuals who do not have the time to track the markets and at the same time, want to earn higher returns on maturity coupled with a life cover.
We believe that the savings of risk-averse or gullible investors should not be subject to the vagaries of the markets. All said and done, life insurance has proverbially been considered 'sacred', isn't it?
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