With the upswing in the stock markets in pas few months,ULIP have made a strong comeback. Many insurance companies have recently launched cheaper online ULIP’s to take advantage in the surge. IRDA amended ULIP guideline several times but fundamentally nothing much has changed.The only reason for the recent upswing in the sale of ULIP policies seems to be the strong performance of the stock markets since May 2014.
Lessons from history
ULIP’s were first introduced by UTI in 1971. Private insurers entered the market in 2000 and due to lucrative commissions their agents sold these policies aggressively during the stock market boon of 2005-2008. Customers were promised doubling of their money in three years. With the stock market crash on 2008 many realized that instead of their money being doubled they were not even lucky to get back even half of the amount they invested. In some extreme cases customers got back almost nothing after 3 to 5 years. With complaint of mis-selling piling up, IRDA amended its existing guidelines to reduced commission that can be paid to agents and increasing the lock-in period of such product to five years. Despite of this the commission paid to insurance agents is much higher than commission paid on other financial products. Attractive commission rate on first year premium and passive income on renewal commission is the main reason for misspelling in insurance sector.
Charges are still high
In the previous avatar the charges in some of the ULIP’s were as high as 100% of first year’s premium. The new guidelines by IRDA substantially reduced the exorbitant upfront charges but other charges like mortality and policy admin chargescontinue to be high. The maximum commission that can be paid to agent for a five year policy is 15% % of first year’s premium and in the case of 10 year policy it is 30%. Mutual funds in comparison have no entry load.ULIP’s failon the insurance front as well. Mortality charges are also higher in comparison to pure insurance term plans.
Lack of Liquidity
The Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender the policy. Even partial withdrawals are not allowed till the end of fifth year.Agreed that insurance is a long term product but what if fund doesn’t perform well. Why should policyholder bear the loss for inefficiency of fund manager? In case policy holder is unable to pay renewal premiums any time during the first five years the entire money is moved into the discontinued policy fund where it lack the opportunity to earn good returns.
Performance comparison is difficult
Unlike mutual fund not many resources are available to compare performance of various ULIP fund. Comparison of performance against its benchmark or evaluating performance on the bases of risk adjusted returns is not possible in case of ULIP in the absence of complete information. As a result most investors are shown only favorable data to influence their decision.
Fails to serve the object of Insurance
If a 30 year old individual pays a yearly premium of Rs 10,000 towards his ULIP, he will get insurance cover of Rs. 1,00,000 at the multiple of 10 whereas he can get sum assured more than Rs. 1 crore with same premium through a term insurance plan. Another important reason to avoid ULIP is that unlike term insurance plan, premium for ULIP is higher and as a result policy holder finds it difficult to continue the policy throughout the desired term. If the policy holder discontinues paying premiums, all insurance benefits under the policy will cease. Moreover it may be difficult to buy a term plan at later stage especially in case of poor health status of the policyholder.
ULIP was launched with the dual objective of proving insurance and investment. Considering the above facts it has failed miserably on both fronts. It does not provide adequate insurance coverage nor does it provide any meaningful return on investment. The only groups of people who benefit from ULIP’s are the insurance companies and their agents who easily mint money at the cost of hapless investors. The insurance needs of the common man can easily be met through term insurance policies. ULIP as an investment product fails to achieve its stated objective and should be avoided.