ULIP: Whose Baby Is It Anyway?

ULIPs, one of the most popular products offered by insurance companies, have been in the news ever since SEBI banned 14 life insurance companies in the private sector from raising funds through these plans.

ULIP is a unit-linked insurance plan. This is a type of investment where the characteristics of insurance and mutual funds are combined. Accordingly, a part of the premium is utilized towards the insurance cover as well as the administrative charges and the rest is invested as per the option selected by the investor. On the other hand, a mutual fund is a pure investment option that provides long-term growth through capital appreciation as well as dividend distribution. While ULIPs are regulated by Insurance Regulatory and Development Authority (IRDA), mutual funds are regulated by Securities and Exchange Board of India (SEBI).

The rift between the two regulators began when SEBI issued show cause notices to some life insurance companies early this year asking as to why action should not be taken against them for selling ULIPs without its approval. SEBI’s premise was that since these products invest majority of their corpus in the capital markets, insurance companies should have taken its approval before launching them. Interestingly, the Central Board of Excise and Customs (CBEC) too had opined in February 2008 that ULIPs bear similarity to mutual funds.

However, insurance companies contested this by saying that ULIP is a life insurance product and hence is not covered under the definition of securities under the Securities Contracts (Regulation) Act, 1956. They have further added that insurance cover was the predominant feature of a ULIP and hence mere existence of an additional investment feature does not make it an investment product.

In the IRDA and SEBI’s recent spat, IRDA directed the insurance companies to ignore SEBI’s notice and continue selling ULIPs. In fact, it was the Finance Minister’s intervention that restored the status quo for ULIPs. For now, the government has directed IRDA and SEBI to go the court to decide as to who will regulate the investment part of ULIPs. Obviously, both the insurance companies and the policyholders heaved a sigh of relief.

The key issue is, is there any need for more stringent regulations on ULIPs? If yes, is the joint regulation by [PAGE BREAK]

IRDA and SEBI the right way to go ahead? There is no denying the fact that ULIPs do not have the required level of transparency that a long-term investment product should have. Besides, there is a need to address the issue of mis-selling of ULIPs. Though most investment products including mutual funds too face this problem, there is a feeling that ULIPs require serious and immediate attention to get rid of this menace.

Moreover, there is also a need to resolve the anomalies in pricing and distribution of investment-related products in order to create a level playing field. This will ensure that the investors get the best possible advice for their hard-earned money and that can go a long way in achieving their various investment goals. It is a well-known fact that insurance companies pay much higher commissions for selling ULIPs than what mutual funds pay for selling their products. The scenario changed dramatically after introduction of a no-load regime for mutual funds w.e.f. 1st August 2009. This resulted in many distributors/agents hard-selling ULIPs, thereby compromising the interests of investors.

Insurance companies justify high commissions on account of low insurance penetrations and the efforts required on part of agents to reach out to investors. One must realise that even mutual funds face the same issues.

Hence, there should be a level playing field to ensure healthy sales practices. Also, regulators need to realise that entities involved in the expanding the market for investment products need to be compensated in a  reasonable manner for their efforts. Too much focus on reducing the costs may curtail the reach of these products, jeopardizing the wealth creation process of millions of retail investors.

Meanwhile, investors need not worry about the safety of their money invested in ULIPs. This whole episode is most likely to ensure more benefits for them by way of greater transparency, lower costs and better advice.