What To Do Now? - SEBI-IRDA ULIPs War

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Most holders of Unit-Linked Insurance Plans (ULIPs) say their insurance agent informed them about the commission upfront, though very few know, or were informed, that it is often upwards of 20 to 30%. Existence of such areas of confusion amongst policyholders is a dangerous sign for the industry, caught in a regulatory tug-of-war over ULIPs between Insurance Regulatory Authority of India (IRDA) and the Securities and Exchange Board of India (SEBI). Traditionally, the ULIPs have been under the regulation of the IRDA. This regulatory dominance has been challenged by the SEBI, which contends that the ULIPs should come under its own purview. This tussle finally moved from the Finance Ministry into the courts.

Whenever there has been a change in the norms for ULIPs—whether it is the ban on short-term plans or the reduction in charges—new buyers have always been in a better position as compared to the existing buyers. No one knows how the SEBI-IRDA ULIP war will take turn. Nevertheless, if the ban on entry loads into mutual funds is any indication, SEBI appears to be keen on having lower commissions and lower first-year charges on ULIPs. The flip side to this argument is that none of the existing charges will change—the entire dispute being more a turf war and not about giving the consumer a better deal.

Today, the biggest safety net for a policyholder is the backing of the regulator. The regulator has the power to ask promoters to infuse capital if it feels that a company’s finances are under stress. The cause for concern is that the regulator’s absolute powers have now been questioned. Observance of SEBI’s order could result in a forced, premature surrender of insurance policies, causing substantial loss to the policyholders and to the insurers. Additionally, stoppage of the sale of products could cause a complete drying up of revenue flows to insurance companies, which could disrupt the payment of benefits on maturity, on death and on other admissible claims, putting the policyholder and the general public to great financial loss. While SEBI’s order was not followed, it has not been nullified either. The ambiguity therefore continues.

Not buying a new policy at this juncture is recommended. Experts however advise the policyholders to continue with their policies. This would apply to even those investors who bought their policies in March for tax-saving purposes and now have the option of returning the policy under the free-look period, which ranges from 15 days to 30 working days.

Unless you have committed a large portion of your annual savings for investments into ULIPs in March, you should continue with the existing policy for the following reasons:[PAGE BREAK]

a) Tax Benefits: Chances are you have declared your purchase of ULIPs as tax-saving investments for the year. A return of the policy is similar to having not bought the tax-saving instrument. Hence, the investment proof you have provided would be incorrect and you would be subject to additional tax. This would lead to unnecessary complications.

b) Deductions: If you choose to return your policy under the free-look clause while you will get back most of your money, some portion will however be deducted, including the stamp duty, the pro-rata risk premium on the sum insured and the cost of courier charges. The stamp duty charges are deducted because these have already been paid to the government and it would be almost impossible to get them back. The pro-rata risk premium is deducted because the insurance company is considered to be at risk from the moment it accepts your cheque as it would have to pay the sum insured, in case you expire in a few days following your purchase.

c) Understanding with agent: If your agent has explained the policy quite well and you trust his/her judgement, you should hold on to the policy. If you have understood the policy well enough, you can decide the right course of action, if at all there is a change in the regulatory regime.

Take home: Life insurance companies are eagerly awaiting the outcome of the stand-off between the IRDA and SEBI on ULIPs. In the SEBI-IRDA war, insurance companies may suffer if investors stop buying ULIPs. However, from an individual’s point of view, there are enough reasons for him/her not to purchase ULIPs till the dispute between the insurance regulator and the SEBI, over who will regulate this product, is resolved. With regards to existing policyholders, the SEBI has watered down its stance and said that insurance companies can continue to service existing policies, which means that even if the SEBI regulates ULIPs, it will take care of the interests of existing policyholders.