What makes Ulips controversial

Insurance and investment are two different needs. Then, there are Ulip pension plans with no sum assured. No wonder, there is confusion.

For three action-packed days, the Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda) have been engaged in a tussle on unit-linked insurance plans (Ulips). And the battle rages on with the Sebi issuing a statement today that new launches post-April, 9 will need its nod.

Sebi’s main grouse: Since Ulips are investment products as well, they should follow its guidelines. But Irda Chairman J Hari Narayan says there is no case for dual regulation of Ulips.

Between the two regulators are 70.3 million Ulip policies (as on March, 2009) and premium of Rs 90, 645 crore – certainly, not a small amount.
 

PROS AND CONS

Plus

• Fund managers get more time to hold stocks because of the lock-in period
•   Returns from Ulips are EEE (Exempt-Exempt-Exempt)
•   Four free switches in a year between 100 per cent debt to equity schemes

Minus

• High costs like premium allocation charge, policy administration charge, mortality rate
•   Knock-off units (High NAVs do not mean high returns)
•   Costs are front-loaded

For investors, Ulips have been a way to get insurance-cum-investment benefits. Typically, an Ulip works in this manner. A policyholder puts in an ‘X’ amount of money for certain years. His money gets invested in both equities and debt, depending upon his risk appetite.

There are plans where the sum is assured, thereby assuring policyholders of a certain sum if they were to survive the policy period. But the premiums are extremely high. Here’s an example: If a 30-year old were to buy a 20-year Ulip with a sum assured of Rs 10 lakh, his premium would vary from Rs 25,000 to as much as Rs 2 lakh (sum assured = five times the premium).

On the other hand, a term plan which is the purest form of insurance would cost a mere Rs 3,370. The only problem: If one survives, he/she stands to lose the entire amount of Rs 67,400 (3,370x20) paid as premiums in a term plan.

From a personal finance perspective, if one were to invest the difference – Rs 21,630 (Rs 25,000 - Rs 3,370) in any instrument that gives 8 per cent returns (from Public Provident Fund), the returns would be the same at Rs 9.8 lakh. That too, after losing the entire term plan amount of Rs 67, 400. If one were to invest the entire Rs 25,000 in a PPF, the returns would be higher at Rs 11.44 lakh.

And that’s not all. As Gaurav Mashruwala, certified financial planner puts it, “Insurance is bought so that if a family member dies, the family is assured of a certain amount. Ulips, being market linked, defeat this purpose because of the uncertainty in the eventual benefit.” In case of an untimely death, the family of the policyholder gets the higher of the sum assured or market value of the scheme.

Also, there are too many options. For instance, there are numerous variants that offer you covers like five times initial premium, two times initial premium and so on.

Then, there are products that give you the option between sum assured and returns based on the market value. There are many Ulip pension plans that do not give you any cover or sum assured.

As a buyer, there is quite a lot of confusion about the plan to be purchased. In a good market condition, the net asset value (NAV) can look really high. However, some costs like the policy administration charge and mortality rate are deducted from the units. The returns, obviously, get reduced because of lower units.

Of course, there are additional costs, in terms of premium allocation charge that are deducted in the initial two-three years itself. This can range between 15-80 per cent, sometimes even 100.

There are some benefits of these policies as well. They provide Section 80C benefits. In addition, when the corpus is accumulated, there is no taxation on it because of the EEE (exempt-exempt-exempt) policy. But if the investor surrenders the policy within the first three years, the 80 C benefits will go away.

Also, these schemes allow investors four free switches to different variants of debt and equities composition schemes. So in a rising market or a falling market, an investor can move his money without any charges. P Nandgopal, MD & CEO, IndiFirst Life, said, “Ulips offer a combination of benefits bundled into one, for the convenience of the investors. It also gives access to a specific asset class and asset allocation as per the changing risk profile of the individual without any extra cost.”

However, as most financial planners always advise, investment and insurance should be kept separate. And the fact that policyholders become investors in insurance schemes contradicts the basic principle of financial planning.