The ULIP War ??

The Unit Linked Insurance Plan designed to bring you best of both worlds -- the Capital Markets and Insurance has recently caught in the middle of two fighting regulators for dominnace. Which side are you?





Let us try to understand the product first:



Investor puts a certain amount of money at pre-determined intervals for a specified period of time. Thus it has characteristics of a pure SIP , the familiar Systematic Investment Plan. This is what you get from Mutual Funds. Now imagine, if you have a term insurance attached to it covering your life for all that period you run your SIP. Now what you have is a hybrid of both Capital Market and Insurance - the ULIP



Now a bit of history:



UTI brought up ULIP 1971 as their second scheme with a tie-up from LIC of India offering Insurance coverage at a limited sum assured.



When privatrisation of Insurance industry took place in year 2000, the private Insurance players found the path opened by UTI & LIC to offer varying sum assured and captured the tag 'ULIP' itself to dominate forgetting about their own primary objective to offer protection products to the people at large. Common feature being mortality charges are not linked to age in many of them as is the case with maiden ULIP from UTI way back in 1971. No assured bonus or partly assured bonus is there in them other than the market value of investments left to the credit of the insured.

In a last bid effort to save themselves from oblivion, the MFs re-vamped their schemes with higher Sum Assured and somehow tried to remain floating. UTI, DSP-BR, Reliance and Birla SL were there facing the onslaught of private insurance companies. Among them only UTI tied the mortality rate to age and kept it distinctively different from its other schemes. Others just made it a rider for open ended schemes where SIP is permitted. And SEBI made a ban of entry loads for new or existing schemes of MFs with effect from August 2009 . Added to it , very stringent disclosure norms regarding Net Asset Value, Portfolio and Deployment of the funds and finally Charges collected from investors.



In 2008, the Insurance Council of India, the self regulatory authority of Insurance companies pulled the first shot by forbidding insurance companies to co-operate with MFs to launch ULIPs/and severe all such relationships.



Sensing trouble, AMFI took up the cause of MFs and forced SEBI for an enquiry to overlapping to the capital market. It gave notice to 14 insurance companies for violating SEBI norms for dealing in Capital market products. Now in 2010, SEBI has banned fresh issue of all such products by any body in the market. IRDA followed suit. Finally, the Finance Ministry has told both regulators to abide by legal decision in the matter. More than a turf war, there is a question of governance, ethics, and morality about planting trees on the fence leading to legal battle across generations!!

When Gold ETFs were to be introduced in the market, there has been a lot of negotiations among experts, Forward Market Commission and SEBI finally decided that it shall be offered through the MF route considering the complexities of the product and need for stringency in laws and enforcement.

Similarly when REALTY was to be securitised the MF route was insisted than the Investment Trust route as in the western countries.

Going forward?

Let good sense prevail upon all so that a good product does not face extinction . Pl understand Insurance is protection and not investment. Investment is to manage risk and genertae return. Protection is to bring consolation in the event of an event happening. Both are different.

Use these products distinctively different in your financial plan, you will succeed in meeting your life needs.

Related links

1. The highest NAV Assurances?
2. Savings through Protection Plans
3. Protection Planning