Why New ULIPs are not popular?

Unit Linked Insurance Plans commonly called as ULIPs have benefits that are linked to market. ULIPs acts as an investment instrument combined with life protection. ULIPs work on the same mechanism of mutual funds where premiums are utilized to buy the units of investment assets. Policyholder has the choice to invest in different funds available in the market. ULIPs are different from mutual funds in a way policyholder can switch to different funds within a year and has also the facility of partial withdrawal at different intervals from the fund starting after five years of the policy issue date.

After the liberalization of insurance sector in India, ULIP became very popular constituting around 80 per cent of the portfolio of life insurers. ULIPs’ cash value is derived on the current net asset value of the underlying investment and so the rising stock market also added to the sale of ULIP. Though ULIP was good product of its kind but it was loaded with high commission component. Sum of first three years commissions almost comes to around 50-55% of the annual premium. This lead to malpractices among agents & other financial advisors and they used to mis-sell it by saying that one has to pay premium for only three years and policyholders can withdraw its money after the said period. Policyholders not aware of the consequences relied on their agents and lost their money when they withdrew it just after 3 years. Insurance is a long term contract so one should keep invested its money for long duration to reap the benefit.

Insurance regulator of India came into action when these practices got prevalent in the market and policyholders started losing faith from insurance. The IRDA, insurance regulator of India, came out with new guidelines for the ULIPs which came into effect from September 1, 2010. Post this regulation commissions were slashed heavily and other charges also got reduced giving higher benefit to policyholders, but now it was not in the interest of agents/intermediaries they started discouraging sales of ULIP. Post-regulation life insurance industry saw slump in the sales and the volatile stock market also added fuel to the situation.

We hear from many sources that they are reluctant to buy new ULIPs as it is not good now, we feel very saddened by the prevailing misconception and so we thought it was pertinent to compare the ULIP products for the two periods – pre & post regulation – and leave it to the readers to form their own views.

We took both products from the same company with similar coverage & features. The life under consideration is taken male person aged 30 years old. We call the two as Old ULIP and New ULIP. Here is the table of our findings:

 

	Old ULIP	New ULIP
Annual premium	` 50,000	` 50,000
Policy term and premium payment term	20 years	20 years
Investment fund	Balanced fund	Balanced fund
Return on investment	10%	10%
Fund at maturity	`23,60,164	`25,43,372
Commission payable	`47,500	`13,000
Fund Management charges	`2,96,378	`2,19,352
Admin, premium allocation & mortality charges	`61,527	`30,809
Mortality charges deduced up to	9th year	8th year
Net rate of return	7.62%	8.95%

The table shows comparison on factors which are important for any unit-linked insurance plan. We can see here that fund at maturity is higher by 3.6 times of annual premium in the New ULIP as compared to the Old ULIP. You would also notice that all the charges have been slashed substantially. Fund management charges (FMC) have come down, in this case the New ULIP has 26% less FMC compared to Old ULIP. Commissions payable to agents/intermediaries are also lower; here it is around 70% lower. All this happened due to the capping of charges and hence more money is allocated for cash value to give policyholders a better return. Policy Administration & premium allocation charges have also reduced noticeable by 50% in our example. Mortality charges which companies deduct for taking the risk is for shorter period in the New ULIP, this means that your investment part of policy exceeds the sum assured amount sooner so you end up with more money at the time of maturity or even during the policy term if some misfortune happens. The basic purpose for which ULIP is designed is for investments so thumb rule says that given the same risk whatever product is giving higher return is better. Here in our example we found that New ULIP gives nearly 133 basis points higher return on the investments (8.95 per cent as against 7.62 per cent). This clearly establishes that the regulations which came into force effective September 1, 2010 have actually given the product a facelift.

We hope that this example would help you in better understanding the new ULIP.

Why aren’t New ULIPS selling?

There are a number of factors which are responsible for the decline in sales of new unit linked products. Major factors which have contributed to decline in market share of unit linked products are given below-

·        Volatile equity markets: We are all aware that post September 2010 crash, equity markets have been extremely volatile. Just when there is the slightest semblance of stability reports of economic uncertainty in one part of the globe or another, resurface which push the equity markets southwards. Since, those who invest in ULIPs prefer to have medium to high exposure in equity-linked funds; they do not prefer to invest in ULIPs. Their apprehensions, however, are unfounded and without any substance, if they are long term investors. It is well established that in the long run, return on equities are better than returns from other traditional avenues of investment.

·        High interest rates: In a high interest rate scenario, people tend to shift more to non-unit linked products. Hence, the equity investment tends to be lower.

·        Negative public perception: ULIPs came under severe criticism of mis-selling from virtually all quarters. The truth was that without understanding the risk implications, investors lapped up unit linked products just because someone’s friend, neighbour, colleague or relative was getting great returns after investing in ULIPs. They either completely forgot, or ignored the most common words of wisdom ‘higher the return, greater the risk’. Greed, after all, transcends all boundaries. When markets came crashing down such ‘short term investors’ cried hoarse that they were being misled into investing in ULIPs which they believed was an avenue for safe investment as it was an insurance product!  

·        Insurance is a push product, therefore, it depends which product is being pushed: Generally it is true that while buying an insurance product many people go by their agents’ recommendation. It is also true that, in general, an agent would push a product in which he earns higher commission. Since agent’s commission has come down drastically as a result of the guidelines, insurance agents are no longer too keen to sell ULIPs any longer, barring exceptions of course.

·        Increased Lock in period: The lock in period in the case of new ULIPs has been increased from 3 to 5 years. This, in the opinion of some people is not viewed positively. It needs to be understood that one does not buy a unit linked product for short term gains. Unless you stay invested through the term of the policy, you would be able to derive optimum benefits.

·        Loan: Generally, insurers are reluctant to provide this feature in ULIPs. In fact even the insurance regulator is not too favourably inclined for this feature to be provided any longer, if one goes by recent reports. This certainly has a negative impact and goes against the popularity of ULIPs.