ULIPs, more investment than insurance

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ULIPs may need to be regulated as investments simply because people buy them for market-related returns. Pure term cover can be bought at a fraction of the premium one pays for ULIPs. Mortality charges were as low as 2 per cent of the premium for some recent plans.

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Investors shellout hefty premiums on children's plans more to fund their education than to get life cover.

For select private insurers and their large agent force, SEBI's order on Friday banning 14 private insurance companies from soliciting investor money ‘by way of subscriptions for any product having an investment component', may have come as a bolt from the blue. The reference is to ULIPs, the popular unit-linked insurance plans marketed by insurance companies.

Questions can be raised about why SEBI chose to rake up this issue now, after ULIPs have been around for so many years, or even why LIC and a few private insurers have been left out of this order. However, SEBI's basic premise in seeking jurisdiction over ULIPs, appears quite justifiable.

Investment, not insurance

The debate on whether SEBI really has the powers to regulate ULIPs has so far centred largely around technical issues: whether ULIPs can be defined as ‘securities', whether they are ‘contracts of insurance' or collective investment schemes, whether the insurance component of a ULIP can be separated from the investment part. But why not bring the issue down to its most basic aspects? One, does an investor buy an ULIP because he wants insurance or does he view it as a market investment? Two, what portion of the money he puts in actually goes into insuring his life and what portion into investing in market instruments?

The answer to both these questions leads to the conclusion that ULIPs are indeed more investment than insurance.

ULIPs have been a major growth driver for private insurers mainly because they offer an investment solution to the financial goals that common people have. Investors who are drawn to a ‘Young Star' unit-linked plan or a ‘Smart Kid' plan obviously do not shell out that hefty yearly premium just to put in place a risk cover on their own life. They do so because they believe the plan's market investments, over a 10 or 15 year period, will generate a sum large enough to fund their child's education.

The same goes for retirement plans and pension plans, where the aim is to secure a regular pension or corpus after retirement, rather than just risk cover. (Indeed, their advertisements are all about being self-sufficient after retirement!) These two are among the most popular types of ULIPs marketed today.

If ensuring a payout to one's nominees on death was indeed the investor's objective, pure term plans offered by insurers would achieve this at a fraction of the premium that one commits to a ULIP. A 40-year-old can today purchase a 10-year pure term cover of Rs 10 lakh on his life for a premium payment of just Rs 4000-5000 a year. Compare this to the annual premia of Rs 20,000 to Rs 1,00,000 that several ULIPs demand today and you can see that a good portion of the premium paid is likely to be directed towards market investments. Nor can insurers take refuge in the argument that much of the investor's premium payment in a ULIP goes to cover the ‘risk' on his life. In fact, mortality charges, the sums deducted by insurers from ULIP premia towards risk cover, take up only a minuscule portion of the actual premium paid in quite a few cases.

A random check on the product brochures of a few recent ‘guaranteed NAV' ULIPs reveals their mortality charge to be at 1-2 per cent of the annual premium paid. Can ULIPs which direct only a small portion of the investor's money into insuring his life, really claim that they are ‘insurance contracts'?

Greater good?

That the securities market regulator should have some jurisdiction over the proliferating ULIPs is also desirable from a broader market perspective. For one, only a common set of regulations for all market-linked products — whether they are mutual funds, ULIPs or anything else — will establish a level-playing field on rules relating to distribution, selling practices and reward, for financial market intermediaries. Two, it will simplify the investor's life as he need not familiarise himself with multiple sets of rules, one for mutual funds and another for ULIPs, and so on.

But most important, bringing all market-related products under its umbrella is necessary if SEBI is to effectively discharge its duty of protecting investor interests in the securities market.

Having succeeded in garnering more equity money under their ULIPs than mutual funds have, in all these years, insurance companies today play a large role as institutional investors in the domestic stock market.

Surely, when other large players such as foreign institutional investors and mutual funds that invest in Indian markets are subject to SEBI's writ, insurance companies too need to follow suit, at least for that portion of funds they direct into the stock market.

Ref: http://www.blonnet.com