Indian stock market has seen a steady growth in recent years. Helped by this upswing in stock market, life insurance companies have started focusing on selling insurance products as investment tools and "persuading" their investors to opt for equity exposure through Unit Linked Insurance Plan (ULIP) policies. As per data available, in the past two years, a dominant part of premiums of most private insurance companies have come from ULIP policies. From under 30% contribution to the new business premium in FY14, ULIPs are now contributing well in excess of 60% of new business premiums for the private insurers this year. In some cases, this contribution is as high as 70-80%.
Look before you leap
ULIPs are great products for the customer with their transparent structure and flexibility. However, ULIPs are prone to the vagaries of the stock market. This vulnerability has steered the regulators to make sweeping changes in terms of educating the investors on the risks and opportunities associated with the product. It is important to understand that ULIPs are long-term life insurance products but it's common practice to sell them largely as short-term investment solutions. In a bull-run phase, this product sells like a hot cake owing to the greed for exponential growth or sometimes fears of losing out on the sentiment-driven gains. The same pitch has been widely effective to sell ULIPs, including in the pre-2008 period, where short-term returns of the past were extrapolated over the long term.
Investors would do good to consider ULIP when looking for long-term investment options.
One size doesn't fit all
Before picking a ULIP, the customer is advised to seek the following answers from the agent or person soliciting the product:
Is the investment horizon greater than 10 years?
The lock-in period for ULIP has been extended to 5 years, but to get the best out of the ULIP, you need to hold it for at least 12-15 years. Further, like mutual funds, ULIPS also invest in the markets.
So be prepared for the market risk that the investment will be exposed to. Not only equity funds, even the debt funds can decline in value.
Do you have sufficient protection cover as well?
Typically, one needs an insurance cover of 5-6 times his annual income. This entire insurance need may not come from a ULIP, so buy a term cover before you consider buying a ULIP. If life cover is not 10 times the annual premium, you won't get any tax deduction and the corpus will also be taxable on maturity. Also, the deduction under Section 80C is capped at Rs 1.5 lakh.
Can you afford to pay the premium for the entire term?
It is important to continue investing in a ULIP through the term of the plan. So buy a policy that can continue for the full term without impinging on other financial goals.
Also, it is important that you have done a detailed comparison between the mortality charges in ULIP-led plan and a pure term plan. Once the ULIP is bought, it is advisable to ensure payment of premiums regularly and monitor its performance on a regular basis. ULIPs offer great flexibility to the customer, which can be leveraged; asset allocation can be easily changed through fund switches and premium redirection - all through few clicks on the insurers' websites.
Mis-selling
Insurance awareness in India is low and insurance largely is a push product than a pull product. The regulator in the past has been tightening the screws around insurers to invest in investor awareness and simplify the products to help customers choose the right product, but mis-selling continues to be rampant in the industry. However, it is very difficult to control every conversation related to the sale of ULIPs in a market with over two million licensed advisers across the country.
Being well aware of this pitfall, it is obligatory on the insurers that they take special care to ensure that ULIPs are being rightfully sold as protection and long-term savings solution. To top it all, the industry is also fighting sporadic cases of spurious calling - wherein unauthorised personnel pose as company officials and sell "lucrative" interest-free loans etc to customers who get duped on such false promises and end up trusting their hard-earned money to these miscreants only to get duped - which is a menace to the industry. While the industry is making all efforts to safeguard the interest of the investors, it is also advisable that investors do due diligence while buying their policies.
Remember there are two sides to every coin
In summary, it is advisable for both the insurer and the customer to be circumspect about ULIPs and not be carried away by the euphoria of the rising capital markets. If one fails to do this, then the history will continue to be an elusive yet demanding teacher in the future too.
For insurers, growth driven predominantly by ULIPs should be a cause for concern; economic cycles do turn and a similar backlash in a period of economic downturn would break down customer trust irrevocably and for customers, they would have only themselves to blame for not learning from their own and other's well-documented experiences.
Lastly, the prime objective of insurance is protection. Focus on the protection provided by the policy. For investments one has many options to choose from.
The author is Chief Agency Officer at Reliance Life Insurance Company Ltd. The views expressed in this article are his own
Look before you leap
ULIPs are great products for the customer with their transparent structure and flexibility. However, ULIPs are prone to the vagaries of the stock market. This vulnerability has steered the regulators to make sweeping changes in terms of educating the investors on the risks and opportunities associated with the product. It is important to understand that ULIPs are long-term life insurance products but it's common practice to sell them largely as short-term investment solutions. In a bull-run phase, this product sells like a hot cake owing to the greed for exponential growth or sometimes fears of losing out on the sentiment-driven gains. The same pitch has been widely effective to sell ULIPs, including in the pre-2008 period, where short-term returns of the past were extrapolated over the long term.
Investors would do good to consider ULIP when looking for long-term investment options.
One size doesn't fit all
Before picking a ULIP, the customer is advised to seek the following answers from the agent or person soliciting the product:
Is the investment horizon greater than 10 years?
The lock-in period for ULIP has been extended to 5 years, but to get the best out of the ULIP, you need to hold it for at least 12-15 years. Further, like mutual funds, ULIPS also invest in the markets.
So be prepared for the market risk that the investment will be exposed to. Not only equity funds, even the debt funds can decline in value.
Do you have sufficient protection cover as well?
Typically, one needs an insurance cover of 5-6 times his annual income. This entire insurance need may not come from a ULIP, so buy a term cover before you consider buying a ULIP. If life cover is not 10 times the annual premium, you won't get any tax deduction and the corpus will also be taxable on maturity. Also, the deduction under Section 80C is capped at Rs 1.5 lakh.
Can you afford to pay the premium for the entire term?
It is important to continue investing in a ULIP through the term of the plan. So buy a policy that can continue for the full term without impinging on other financial goals.
Also, it is important that you have done a detailed comparison between the mortality charges in ULIP-led plan and a pure term plan. Once the ULIP is bought, it is advisable to ensure payment of premiums regularly and monitor its performance on a regular basis. ULIPs offer great flexibility to the customer, which can be leveraged; asset allocation can be easily changed through fund switches and premium redirection - all through few clicks on the insurers' websites.
Mis-selling
Insurance awareness in India is low and insurance largely is a push product than a pull product. The regulator in the past has been tightening the screws around insurers to invest in investor awareness and simplify the products to help customers choose the right product, but mis-selling continues to be rampant in the industry. However, it is very difficult to control every conversation related to the sale of ULIPs in a market with over two million licensed advisers across the country.
Being well aware of this pitfall, it is obligatory on the insurers that they take special care to ensure that ULIPs are being rightfully sold as protection and long-term savings solution. To top it all, the industry is also fighting sporadic cases of spurious calling - wherein unauthorised personnel pose as company officials and sell "lucrative" interest-free loans etc to customers who get duped on such false promises and end up trusting their hard-earned money to these miscreants only to get duped - which is a menace to the industry. While the industry is making all efforts to safeguard the interest of the investors, it is also advisable that investors do due diligence while buying their policies.
Remember there are two sides to every coin
In summary, it is advisable for both the insurer and the customer to be circumspect about ULIPs and not be carried away by the euphoria of the rising capital markets. If one fails to do this, then the history will continue to be an elusive yet demanding teacher in the future too.
For insurers, growth driven predominantly by ULIPs should be a cause for concern; economic cycles do turn and a similar backlash in a period of economic downturn would break down customer trust irrevocably and for customers, they would have only themselves to blame for not learning from their own and other's well-documented experiences.
Lastly, the prime objective of insurance is protection. Focus on the protection provided by the policy. For investments one has many options to choose from.
The author is Chief Agency Officer at Reliance Life Insurance Company Ltd. The views expressed in this article are his own
