A Product Less Bad... Is Still a Bad Product

Kripananda Chidambaram, 05 Aug 2010

What's happening?

Following a public spat between India's insurance and mutual fund regulators (i.e. IRDA and SEBI), the former has been forced to finally act in favour of the millions of customers who are being mis-sold life insurance policies as investment schemes. These products, called Unit Linked Plans or ULIPs, have long been an industry and agent favourite, due to their extremely high commission and cost structure. Never mind that the hapless and uninformed investor has been at the receiving end in terms of negative returns, low (or no) life cover and larger than expected lock-in period of investments.

Effective 1 September 2010, IRDA has announced some changes to ULIPs. We believe the important ones from an investor perspective are:

  • ULIP charges (which get straightaway paid to the broker as commissions) will be capped. Also, these will be spread over the life of the product, rather than charged in initial years.
  • Surrender of ULIP will be permitted after five years, with no surrender charge
  • Compulsory life cover of 10 times the first-year premium 
  • Pension products will be compulsorily converted into an annuity (i.e. annual payments like a pension to the investor), the minimum yield of which will be 4.5 percent

 What does it mean for me?

A product less bad is still bad. ULIPs have simply become less of a rip-off, with the introduction of the new guidelines. As an informed investor, you should continue to steer clear of these products even after 1 September.

For instance, a reduction of first-year charges from 40% to 10% appears interesting, but you will need to stifle a yawn when you realise that mutual funds (the alternate investment vehicle) are at 0% already. A minimum sum assured of 10 times annual premium seems a great deal, but a Term Plan may offer a sum assured that is 500 times annual premium, or even more.

Given the current momentum in the industry, we foresee a more proactive IRDA further making ULIPs customer-friendly in the coming months and years. We will reconsider our stance then. For now, it is battling the strong insurance industry and agent lobby that has much to lose from these customer friendly rules. So as of now, the only insurance plans that appear worth considering are the pure Term Plans. For all investment purposes, mutual funds are the way to go.


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