Source: Equitymaster Newsletter
Our dislike for Unit Linked Insurance Plans (ULIPs) is well known. Time and again we have highlighted why we are not fascinated by this bundled product which offers dual benefits of insurance and investment. And when recently we came across an article from one senior executive of a private Life Insurance Company propagating ULIPs, we thought it was an opportune time for us to re-iterate our stance on them.
Well, the primary reason why people get attracted to such products in first place, is because of the twin benefit which is on offer. Plus, investment in ULIPs also presents income tax benefits to investors. Further, the bancassurance channel gave an easy platform to ULIPs. For the want of commissions they were pushed aggressively through the banking channel.
However, when it comes to performance they have failed miserably. For one, their return was linked to market performance. And this factor was camouflaged when hard selling to a policy holder. So, when markets were in a downturn, many policyholders lost their net worth. And that too in insurance cum investment plan which is supposedly safe! Not to mention the host of charges that further ate away investor returns.
Amidst huge losses, investors fled ULIPs. Since then, IRDA made rampant changes in the product proposition. It capped charges on them since September 2010. Even the fund management expenses had a fee cap. This was done to make the product more appealing.
So, with regulatory changes having being made, should one invest in ULIPs?
Well, investors need to know that charges were not the only factor that led to downfall of ULIPs. The primary reason why ULIPs failed is because they combined both insurance and investment needs of a participant. And investors failed to understand the nature of the product. For instance, the premium one pays includes mortality charges for providing protection. The balance is invested in stock markets. This not only raised ambiguity around the product but also led to a fall in fund value when stock markets fell.
And when investors saw their fund value declining in an insurance plan, they redeemed in fear as they were unaware of such eventuality. High charges further erased their capital. With charges now being regulated, investors can draw some respite. However, the market risk will still prevail.
Also, since these products are not tailor made, there is a scope of huge mis-selling. A 70 year individual can get exposed to equity risk by buying ULIPs which is undesirable at his age! The bottomline is that both insurance and investment needs are separate. We have highlighted this innumerable times. You cannot have a one size fits all policy here. These needs depend upon individual client circumstances.
Hence, no matter what changes are being made to make the product more appealing, investors should be careful. They should keep in mind that lowering fund charges does not eliminate market risk which is inherent nature of this product.
Our dislike for Unit Linked Insurance Plans (ULIPs) is well known. Time and again we have highlighted why we are not fascinated by this bundled product which offers dual benefits of insurance and investment. And when recently we came across an article from one senior executive of a private Life Insurance Company propagating ULIPs, we thought it was an opportune time for us to re-iterate our stance on them.
Well, the primary reason why people get attracted to such products in first place, is because of the twin benefit which is on offer. Plus, investment in ULIPs also presents income tax benefits to investors. Further, the bancassurance channel gave an easy platform to ULIPs. For the want of commissions they were pushed aggressively through the banking channel.
However, when it comes to performance they have failed miserably. For one, their return was linked to market performance. And this factor was camouflaged when hard selling to a policy holder. So, when markets were in a downturn, many policyholders lost their net worth. And that too in insurance cum investment plan which is supposedly safe! Not to mention the host of charges that further ate away investor returns.
Amidst huge losses, investors fled ULIPs. Since then, IRDA made rampant changes in the product proposition. It capped charges on them since September 2010. Even the fund management expenses had a fee cap. This was done to make the product more appealing.
So, with regulatory changes having being made, should one invest in ULIPs?
Well, investors need to know that charges were not the only factor that led to downfall of ULIPs. The primary reason why ULIPs failed is because they combined both insurance and investment needs of a participant. And investors failed to understand the nature of the product. For instance, the premium one pays includes mortality charges for providing protection. The balance is invested in stock markets. This not only raised ambiguity around the product but also led to a fall in fund value when stock markets fell.
And when investors saw their fund value declining in an insurance plan, they redeemed in fear as they were unaware of such eventuality. High charges further erased their capital. With charges now being regulated, investors can draw some respite. However, the market risk will still prevail.
Also, since these products are not tailor made, there is a scope of huge mis-selling. A 70 year individual can get exposed to equity risk by buying ULIPs which is undesirable at his age! The bottomline is that both insurance and investment needs are separate. We have highlighted this innumerable times. You cannot have a one size fits all policy here. These needs depend upon individual client circumstances.
Hence, no matter what changes are being made to make the product more appealing, investors should be careful. They should keep in mind that lowering fund charges does not eliminate market risk which is inherent nature of this product.
