Zerodha co-founder Nithin Kamath in a post on LinkedIn has flagged the surge in sales of Unit Linked Insurance Plans (ULIPs).
"While ULIPs promise the best of both worlds—investment and insurance—the reality is they offer the worst of both," Kamath wrote, noting that the surge in ULIP sales is primarily driven by banks due to the high commissions involved.
"Banks are pushing these products hard because of the lucrative commissions, but the insurance cover provided is usually insufficient," he adds.
Kamath advises consumers to separate their investment and insurance needs. "You’re better off investing in direct mutual funds and buying a term insurance policy. It’s much cheaper and gives you adequate coverage," he says. "Many people don't even realize they have a ULIP or some other terrible insurance product".
The Insurance Regulatory and Development Authority of India (IRDAI) had in June issued a master circular prohibiting the promotion of ULIPs as investment products. This move addresses growing concerns about the mis-selling of these products.
ULIPs are financial hybrids that combine insurance and investment. A portion of the premiums paid by policyholders funds life insurance, while the rest is invested in equities, bonds, or a mix of both. These plans include a mandatory five-year lock-in period, during which withdrawals are not allowed.
The IRDAI’s directive responds to reports that insurers have been mis-selling ULIPs, often marketing them as pure investment products. This practice had already been flagged by the Securities and Exchange Board of India (SEBI). Some insurers promoted new ULIPs similarly to New Fund Offers (NFOs), which could mislead consumers about the product’s true nature.
To prevent this, IRDAI has mandated that all ULIP and annuity product advertisements comply with the Advertising Standards Council of India’s guidelines. These ads must clearly disclose the risks associated with linked insurance products and avoid suggesting that past performance or bonuses guarantee future returns.
What this means for consumers
For consumers, IRDAI’s directive is a step toward transparency. While ULIPs may still appeal to those seeking both insurance and investment, it’s crucial to understand that these products are not purely investment vehicles. The investment component of ULIPs is subject to market risks, and this needs to be communicated clearly to avoid misunderstandings.
When evaluating ULIPs, it's important to consider both the benefits and limitations:
Dual Benefit: ULIPs provide life insurance coverage and the opportunity to invest in various asset classes, making them attractive to those seeking an integrated financial solution. Flexibility: Policyholders can switch between different fund options, allowing for adjustments based on market conditions. However, potential investors should also be aware of the following:
Charges: ULIPs involve multiple fees, such as premium allocation, policy administration, and fund management charges, which can reduce overall returns. Market Risk: The investment portion of ULIPs is subject to market fluctuations, and returns are not guaranteed. Lock-in Period: The mandatory five-year lock-in restricts liquidity, making ULIPs less suitable for those who may need quick access to their funds.