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Is it the right time to invest in ULIPs? Know more

Author: Debasis Mohapatra/Tuesday, December 19, 2017/Categories: Insurance

Is it the right time to invest in ULIPs? Know more

Mumbai, December 19: Unit Linked Insurance Plan, popularly known as ULIP, is getting its mojo back in the past two years on the back of sound performance of equity markets. Post imposition of strict norms by the insurance regulator- IRDA, private insurers have witnessed rise in ULIP sales in recent years.

ULIP offers an investor the option of portfolio diversification as it is a financial product which mixes insurance with investment. An investor can invest in both debt and equity markets through the ULIP route. Due to equity exposure, ULIPs tend to offer higher return than a traditional endowment policy. This product also gives tax benefit to the policy holders under section 80C of the Income Tax Act.

As per available data with Life Insurance Council, more than 50 per cent of the new premium collections of private life insurers like SBI Life, HDFC Life Insurance, ICICI Prudential Life among others came from ULIP category. New premium collections from ULIPs stood at 42 per cent of the overall collections for private life insurers in the last financial year ending March, 2017. Interestingly, most of the growth has come from individual segment.

“ULIP sales are likely to rise in coming years as equity markets have performed well in last two years,” Melvin Joseph, a Sebi registered investment adviser, and founder, Finvin Financial Planners told The Finapolis.

“As equity as an asset class outperforms its peers in coming years, we will see more money flowing into ULIPs,” Varun Saxena, Head of Marketing & Alternate Channels at Karvy Private Wealth said. He also said the recent growth in ULIPs is mostly attributed to rising participation of individuals in equity markets coupled with lower charges imposed on these kinds of insurance products.   

ULIPs in India have a checkered history. During 2004-2008 period, ULIP sales surged on the back of spectacular performance of equity markets. Interestingly, out of every Rs 100 of total premium collected in 2007-08, unit-linked premium contributed Rs 46, making it one of the largest contributors. However, this had led to rampant misselling of this product to investors. 

When equity markets tumbled in 2008-09 post Lehman crisis, investors in ULIPs had to bear the brunt with many instances of capital erosion coming to the fore. Issues like huge upfront commission charged by insurers, high administrative and fund management fees collected from policy holders also surfaced. This prompted the insurance regulator- IRDA to come up with new regulations capping charges apart from introducing a five-year lock in period. These norms have helped ULIPs to regain some its lost position and many analysts see them as facilitators of the current growth phase. 

“Regulations have definitely checked the rampant misselling of ULIPs to policy holders. However, concerns still remain with regard to ULIPs,” Joseph said.

According to financial advisors, lack of standardization of charges is leading to different insurance companies charging different rates on various heads. “Policy administrative charges are very high in case of ULIPs. Apart from this, lock in period of 5 years restricts policy holders to get back their money in case of premature surrender,” Joseph added.

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Debasis Mohapatra

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