What Makes Ulips Controversial

8/9/2019 What Makes Ulips Controversial

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PROS AND CONS

Plus

Fund managers get more time to hold stocks because of the lock-in period

Returns from Ulips are EEE (Exempt-Exempt-Exempt)

Four free switches in a year between 100 per cent debt to equity schemes

Minus

High costs like premium allocation charge, policy administration charge, mortality rate

Knock-off units (High NAVs do not mean high returns)

Costs are front-loaded

For investors, Ulips have been a way to get insurance-cum-investment benefits. Typically, an Ulip works

in this manner. A policyholder puts in an X amount of money for certain years. His money gets

invested in both equities and debt, depending upon his risk appetite.

There are plans where the sum is assured, thereby assuring policyholders of a certain sum if they were

to survive the policy period. But the premiums are extremely high. Heres an example: If a 30-

year old were to buy a 20-year Ulip with a sum assured of Rs 10 lakh, his premium would vary

from Rs 25,000 to as much as Rs 2 lakh (sum assured = five times the premium).


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Round 1 to Irda: Ban on sale of Ulips lifted

On the other hand, a term plan which is the purest form of insurance would cost a mere Rs 3,370. The

only problem: If one survives, he/she stands to lose the entire amount of Rs 67,400 (3,370x20)

paid as premiums in a term plan.

From a personal finance perspective, if one were to invest the difference Rs 21,630 (Rs 25,000 - Rs

3,370) in any instrument that gives 8 per cent returns (from Public Provident Fund), the returns

would be the same at Rs 9.8 lakh. That too, after losing the entire term plan amount of Rs 67,

400. If one were to invest the entire Rs 25,000 in a PPF, the returns would be higher at Rs 11.44

lakh.

ULIP investors are safe: IRDA

And thats not all. As Gaurav Mashruwala, certified financial planner puts it, "Insurance is bought so that

if a family member dies, the family is assured of a certain amount. Ulips, being market linked,

defeat this purpose because of the uncertainty in the eventual benefit." In case of an untimely

death, the family of the policyholder gets the higher of the sum assured or market value of the

scheme.

Also, there are too many options. For instance, there are numerous variants that offer you covers like

five times initial premium, two times initial premium and so on.

Then, there are products that give you the option between sum assured and returns based on the

market value. There are many Ulip pension plans that do not give you any cover or sum assured.


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It's business as usual for insurers from today

As a buyer, there is quite a lot of confusion about the plan to be purchased. In a good market condition,

the net asset value (NAV) can look really high. However, some costs like the policy

administration charge and mortality rate are deducted from the units. The returns, obviously,

get reduced because of lower units.

Of course, there are additional costs, in terms of premium allocation charge that are deducted in the

initial two-three years itself. This can range between 15-80 per cent, sometimes even 100.

There are some benefits of these policies as well. They provide Section 80C benefits. In addition, when

the corpus is accumulated, there is no taxation on it because of the EEE (exempt-exempt-

exempt) policy. But if the investor surrenders the policy within the first three years, the 80 C

benefits will go away.

Finance Ministry to discuss SEBI-IRDA tussle

Also, these schemes allow investors four free switches to different variants of debt and equities

composition schemes. So in a rising market or a falling market, an investor can move his money

without any charges. P Nandgopal, MD & CEO, IndiFirst Life, said, "Ulips offer a combination of

benefits bundled into one, for the convenience of the investors. It also gives access to a specific

asset class and asset allocation as per the changing risk profile of the individual without any

extra cost."


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Irda asks insurers to ignore SEBI ban on Ulips

However, as most financial planners always advise, investment and insurance should be kept separate.

And the fact that policyholders become investors in insurance schemes contradicts the basic

principle of financial planning.

Battle between SEBI AND IRDA

Round two of the spat between Irda and Sebi has gone

to the former. An ordinance passed late last week hands

over the control of Ulips to Irda; jurisdiction over these

hybrid products will now clearly lie with the insurance

regulator. To remove any kind of ambiguity, the

government is also understood to be amending portions of

the Sebi Act, relating to collective schemes, such that

these will not include Ulips or any other schemes that

combine investment and insurance. This is not confirmed

yet but thats clearly the way forward; dual reporting can

be a terrible thing and the last thing we need is for mutual

funds and insurance companies to be confused about who


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theyre regulated by and investors getting jittery about

their savings.

By amending the legislation, which needs to be ratified

by Parliament, the government is putting an end to

unseemly squabbles between financial regulators. Indeed,

the manner in which Sebi passed an order, in April this

year, asking 14 private-sector life insurers to take its

permission before they launched any new schemes, was

quite shocking. Its true that Ulips are nothing but mutual

fund schemes with an added element of an insurance

cover whose risk cover is limited to a minuscule share of

the premium. But the capital market regulator could have

called for a white paper on the subject or initiated some

kind of discussion on who should be regulating Ulips.

While Sebi and Irda squabbled, the High Level Co-

ordination Committee on financial markets (HLCC), chaired


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by the RBI governor, didnt really do much; watching

helplessly since it doesnt have executive powers. The

HLCC could have looked into the commission structures for

Ulips in order to ensure a level-playing field for financial

intermediaries but didnt really come up with any ideas.

However, it seems unlikely now that this committee will

get teeth since a high-level committee, to be headed by

the finance minister, and comprising the RBI governor and

heads of Sebi, Irda and PFRDA, is to be set up. That has

been in the offingthe Financial Stability and

Development Council (FSDC) was announced some time

back. Ultimately, it doesnt really matter which committee

has the powers, as long as nothing falls between two

stools. What the FSDC must ensure is a level-playing field

across financial instruments; Irda has allowed agents to

charge exorbitant commissions of anywhere between 20%

and 40%, at the cost of investors. The mis-selling, too,

needs to be stopped.


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Irda has been talking of bringing down commissions on

Ulips, but just bringing them down is not enough; they

need to be brought down sharply, given that entry loads

for mutual funds are now banned. Life insurers, too, need

to bring down their expenses and this needs to be

monitored the way costs and mutual funds are tracked. So

far, it would seem that Irda has been a rather liberal

regulator while Sebi has been a strict one. This is evident

from the kind of money that life insurers have been able to

pick up from investors; in 2009-10, they are estimated to

have mopped up some Rs 2.6 lakh crore as insurance

premium and four-fifths of this was accounted for by Ulips.

In contrast, mutual funds have seen outflows from equity

schemes in all but three in the last 10 months since entry

loads were banned. In the last one year, barely Rs 3,000

crore have come into equity schemes; total

AUM in equity schemes is just over Rs 2 lakh crore.


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This clearly has to change and while Irda has made the

right noises ever since Sebi attacked its turf, it needs to do

much more. It has already brought down surrender

charges and upped the risk cover, and there is talk that life

insurers will offer guaranteed returns so that those

investors who are willing to settle for lower returns, have a

choice. Pension funds have to be bundled with either a life

cover, health cover or annuities. Also investors in Ulips

need to have access to a variety of investment options; for

instance, life insurers could offer them Index Funds. If

commissions come down, then premium collections will

also come down. However, since there will be some

commission, Ulips will be pushed more than mutual funds.

Its possible that because the government wants the state-

owned life insurer not to lose out, tooit has yielded

ground to private sector players. Had the jurisdiction of

Ulips been handed over to Sebi, and commissions been

done away with, LIC would have suffered. So, in that


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sense, its fine that Irda will supervise Ulips. This is possibly

the best solution. But the FSDC needs to keep an eagle eye

on what is happening, otherwise investors will lose out.

Irda to end upfront commissions, set on major changes for

Ulips

Anirudh Laskarand N. Sundaresha Subramanian

Mumbai: Fresh from its victory in the regulatory turf war over

unit-linked insurance policies (Ulips), the Insurance

Regulatory and Development Authority (Irda) is set to

overhaul the norms governing these popular financial

products.

Ulips are hybrids that combine elements of mutual funds and

insurance, and have drawn regulatory attention because

of fears that they have been pushed down the throats of


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investors by selling agents who earn fat commissions from

insurance companies.

Two Irda officials told Mint on Monday the regulator will soon

declare stringent norms on front-loading of commissions,

surrender charges, risk cover, top-up benefits, and fixed

gains or sum assured for Ulips.

The Economic Times had reported on Monday that the

regulator will introduce new rules to make these products

attractive to investors.

The most significant reform will be a cut in the commissions

that insurance companies pay agents selling Ulipsfrom

the current 57.5% over five years to 30-32%.

In January, Irda asked insurers to manage expenses in such a

way that the difference between the amount paid to


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policyholders and the fund value should not be more than

3 percentage points for Ulips up to 10 years.

For policies above 10 years, it was capped at 2.25 percentage

points. The move, however, could not prevent insurers

from paying hefty commissions to the agents upfront.

The insurers were playing a trick with the policyholders by

offering the benefit of Ulip charge limits only at the

maturity of the product. We will now order the insurers to

maintain a difference of at least 3.3 percentage points

between gross yield and net yield on Ulip investments

through out the duration of the policy and not only at the

maturity, said one of the Irda officials on condition of

anonymity.

Our proposal should bring down the first-year agent

commission from 35% to 10-15%, added the official. For


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pension plans, the first-year commission, will come down

from 7.5% to about 5.5%.

Cut in surrender charges

Surrender charges, too, will be reduced to curb mis-selling.

Currently, policyholders hardly get any money if they withdraw

their policy prematurely.

On the other hand, the insurers, too, stand to lose if the

surrender charges are drastically reduced as insurers

spend on customer acquisition and product development.

Irda wants to strike a balance by capping surrender charges as a

percentage of annual premium to benefit the


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policyholders and allow insurers to charge 15-20% of the

premium as so-called amortization cost when a policy is

surrendered.

Amortization is an accounting practice of spreading the cost of

selling and managing a policy over its lifespan. Till now,

there is no limit on amortization in case of a surrender.

The combination of hefty surrender charge and

amortization cost leaves virtually nothing for the

policyholder in case of premature withdrawal.

In May, the regulator had proposed to cap first-year surrender

charges at 12.5% for Ulips with a term of less than 10

years and 15% for those above 10 years.

The charges were proposed to be capped at 10% and 12.5%,respectively, of the fund value for surrenders in the

second year, while the seventh year onwards there would

be no surrender cost.


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The insurers were pushing for a hike in these limits, but the

regulator now plans to tighten it further. It will order

insurers to deduct 10-15% of the annual premium only as

the surrender charge and return the entire remaining fund

value to the policyholder even in case of premature

withdrawals.

Compulsory cover

In yet another significant proposal that will not only make Ulips

attractive, but also distinguish them from mutual funds,

Irda intends to increase the life insurance component in

Ulips substantially and make it mandatory.

Currently, there are a number of Ulip schemes where either

there is no insurance cover or the maximum insurance


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cover is only five times the premium paid. The regulator

plans to make the insurance cover mandatory.

According to the plan, the life insurance component has to be

at least 10 times the premium paid for policies up to 10

years and at least 1.05 times the annual premium for

policies of 20 years and above.

For policies between 10 and 20 years, there will be yet another

optioninsurance cover of 0.5 times the policy term,

multiplied by the annual premium. If the insurers are not

comfortable with either of this, they will be required to

provide a health cover of at least Rs1 lakh for each year of

Ulip.

The Ulip as we know will no longer exist. All stakeholders such

as insurers, agents and policyholders need to wake up and


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adjust themselves to this new reality. Till now, the focus

has been on investments and returns. Now, we could see a

shift towards life cover and protection, said an insurance

consultant who did not want to be identified as he is

closely associated with Irda.

Pension plans

In yet another significant move, Irda is set to pass an order for

insurers to have a guaranteed yield of at least 4.5% on the

total premium paid for every equity-linked pension plan in

the industry.

At present, linked pension plans do not come with

guaranteed sum assured. The plan is to offer investors

something more than 3.5% that is offered by savings bankdeposits. To start with, we will ask insurers to offer a

guaranteed return of at least 4.5%, added the official.


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MF houses sweat over insurance ordinance

Muthukumar K

Posted: Tuesday, Jun 22, 2010 at 2259 hrs IST

Mumbai: The government ordinance on the life insurance

business has ruffled up mutual fund houses. Echoing the

industry's resentment, a CEO of a large fund house asked,

Why are we being given a step-motherly treatment?

However, fund houses are grudgingly coming to terms

with the fact that two competing products are being

treated in different fashion.

We welcome these steps and the institutional mechanism

(with various market participants) to address common

issues and ensure that competitive products co-exist with

healthy competition among them, said AP Kurian,


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chairman of the Association of Mutual Funds of India

(Amfi). On Friday night, the government had issued an

ordinance, saying that the life insurance business will

include any unit-linked policy or scrips or any such

instruments. MFs have been hit by recent regulations of

Sebi to ban entry loads, while none such exist for Ulip

products. After August 1, 2009, there has been an outflow

of Rs 7000 crore.

After removal of entry loads, the commissions have clearly

reduced, said Alpesh Shah, partner and director of Boston

Consulting Group. Usually, the industry practice is to pass

on the entry load collected from investors to distributors

as commissions. He added that now mutual fund housess

are compensating for it from their own pockets.

The greater worry for the MF industry is the shying away of a

large component of the distribution channel, the


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Independent Financial Advisors (IFA), who numbers stand

at one lakh and contribute 29% of the overall assets of the

mutual fund industry.

Some of the small IFAs (many of whom are part-timers) are at

risk of running out of business, said Shah. He reasons that

today large IFAs (with Rs 1 crore and above of assets under

management) constitute bulk of the IFA assets. And if

these small IFAs are not nurtured, there will no large IFAs

in future. If that happens, it would be an advantage for life

Insurers.

Private life insurance players started operating in the country

seven years after the first private mutual fund was

incorporated. Yet, life insurers are far ahead on following

metrics agents, branches and employees. While there

are close to a lakh agents for mutual funds, it is 29 lakh for

life insurance companies. Mutual funds in all have 17,000


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employees, while life insurers have hired 250 times that

number

PRESS INFORMATION BUREAU

GOVERNMENT OF INDIA

******

President of India promulgates an Ordinance; issues regarding

ULIPs between IRDA and SEBI settled.


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New Delhi, Jyaistha 28, 1932

June 19, 2010

The President of India has promulgated an Ordinance late

last evening amending the RBI Act 1934, Insurance Act

1938, SEBI Act 1992 and Securities Contract Regulations

Act 1956, thereby clarifying by way of an explanation that

Life Insurance business shall include any Unit Linked

Insurance Policy or scripts or any such instruments. This

would set at rest all the issues regarding ULIPs between

two financial regulators i.e. Securities Exchange Board of

India (SEBI) and Insurance Regulatory Development

Authority (IRDA)


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Further, for sorting-out all issues of jurisdiction regarding

hybrid products, a high level Committee under

Chairmanship of Union Finance Minister has been

constituted. Finance Secretary to Government of India,

Secretary, Department of Financial Services and the Chiefs

of four Financial Regulators viz. Reserve Bank of India

(RBI), Insurance Regulatory Development Authority (IRDA),

Securities Exchange Board of India (SEBI) and Pension Fund

Regulatory Development Authority (PFRDA) will be the

members of the aforesaid Committee.

DSM/BY/GN-194/10.

What Makes Ulips Controversial

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