Are ULIPs safe?

At a seminar organised by the Indian Merchants Chamber recently, the Insurance Regulatory and Development Authority raised concerns over the way unit linked insurance plans (ULIPs) were being sold.

It was also worried about the disclosure norms (or the lack of it), which were being followed by life insurance companies.

ULIPs are market-linked insurance plans with a life cover thrown in. But the said cover is lower than most plain-vanilla plans (like endowment plans) as a sizable portion of the premium goes towards investments in market-linked instruments like stocks, corporate bonds and government securities.

The argument that IRDA has put forth is that the primary purpose of insurance is to provide life cover; returns should play second fiddle to the cover. This makes sense, but the insurance companies don't seem to think so.

Trends in the life insurance industry have witnessed a sea change in the last few years. ULIPs have managed to outsell plain vanilla plans by quite a margin.

For some private insurance companies, they account for up to 70% of new business generated. There's nothing wrong with ULIPs per se, but the question that has been a cause for worry is -- do investors know the flipside to investing in ULIPs? It doesn't seem so.

The primary focus of life insurance agents for selling ULIPs has always been the alluring market returns compared to say, a plain endowment plan. In a rising market, the returns do look good. But what these agents fail to convey many a times, is the downside, were the markets to fall.

The agent sometimes handles this fact by telling the individual that he can 'exit' (by surrendering) from a ULIP any time after a minimum of three years and also benefit from a 'possible' appreciation in stock prices over this period.

While this may be true, what individuals do not realise is, it is a costly affair to exit a ULIP after just three years due to the high costs charged by ULIPs upfront. ULIPs, due to their very nature, should always be considered with a long-term view.

The life insurance industry should also be proactive in educating individuals about life insurance. This is especially so in case of ULIPs where individuals definitely need to be informed about the risk-return proposition that ULIPs offer.

Although one might argue that the insurance agent is supposed to play that role, the current state of affairs suggest otherwise. An issue worth contemplating is the so-called 'financial consultants' who sell, not a basket of financial products but only life insurance.

How can one be qualified to be a 'financial consultant' without having the right credentials and with just one product at his disposal? No doubt there is a certification course that needs to be cleared.

But simply clearing the IRDA exam doesn't make anyone a financial consultant. Financial planning requires a lot more grey cells and experience.

We, at Personalfn, have come across clients who after buying a ULIP wonder if they really needed it in the first place given that they already have many other market-linked investments like stocks and mutual funds.

The feeling they take home is that they did not really 'require' a ULIP but were 'sold' one. What they really needed was a simple term insurance policy.