ULIPs get better

The insurance regulator IRDA has done well to cap the charges levied by insurance companies selling unit-linked insurance plans (ULIPs). Additionally, it has demanded more transparency in the way ULIPs are sold. The limit on charges will enhance investor returns while the mandated disclosures will enable investors to make an informed decision.

The way ULIP investment works is that after deducting all costs and mortality charges (cost of insurance coverage), the balance is invested in a fund chosen by the policyholders. A fund management fee is also levied separately. Not only were these costs perceived to be very high, most investors had no clue about the extent of their contribution going towards meeting various charges including agent commission.

In some products over 8% of the money invested upfront would be deducted as a commission! In fact, mutual fund industry has alleged that these high levies and commissions allowed insurance companies to hard sell these products. Sebi has been driving down the cost structure of mutual funds, widely seen as competing product by all the stakeholders ��� investors, fund managers and insurance companies.

The cap prescribed by the IRDA and the disclosures mandated goes some distance in addressing these issues. The prescribed 225-300 basis point difference between gross and net yield, depending on the tenure of the policy, sets a ceiling on costs. Besides, the ���benefit illustration��� is required to clearly mention the gross and net yield at the point of sale, ensuring that the customer is aware of the extent of appropriation of the premium paid towards costs and insurance.

The proposed changes would at least ensure investors get a higher returns due to the cap on the charges. However, for investors to appreciate the product, it is important that the disclosures are complied with in spirit, and this is where IRDA will have to step in and ensure that insurance companies do not get clever by working around the regulation. The regulator must also explore the option of commission-free investments when a customer approaches the insurer and makes the investment directly. Apart from improving returns, less costly direct investment would also encourage financial literacy.