Some of the basic characteristics of a good investment are low-cost, transparency, liquidity, and ease of understandability and comparability.
ULIPs fail miserably on all these. Over and above these basic problems of product design, are a separate set of problems regarding how they are actually mis-sold in India, which makes the basic product problem substantially worse.
The core problems remain those of cost and of complexity. There are two aspects to cost, one is the actual amount of money that is charged from investors and the other is the complex structure of charges which make it impossible for investors to figure out what?s going on. You would have heard claims that ULIP expenses are now down to a range of 2.25 to 3 per cent or so. This statement is obfuscation. This is the expense level that will be achieved by newer ULIP products if investors stay invested for the entire term of 10 or more years. In practice, insurance agents earn so much in the beginning that the entire sales effort (and product design) is arranged to get the investor to quit after three or five years and shift the money to another ULIP. This is the expense level which will be theoretically achieved in the future.
This brings up one basic problem of wrapping up a market-linked investment product in the garb of a long-term insurance contract. In other types of investments, when costs drop, they drop for existing investments also. In mutual funds, for example, whenever SEBI has lowered the expenses that fund companies can charge, that was effective for existing, older investments also. In ULIPs, all the lakhs of crores of investments that are already done will stay at high cost levels for the entire lifetime of those investments.
Moreover, IRDA is unable or unwilling to prevent the abuses that arise from this structure. For example ULIP expenses were lowered for products launched after December 31, 2009. In the weeks leading up to this deadline, insurance companies went into a highly frenzied, intense sales effort in order to lock in as many customers as possible into the older, higher cost products.
The other major problem is the lack of transparency in terms of what kind of returns the investor is getting. The information that is put out by insurance companies, both at a product level and at the level of statements issued to customers is designed to confuse and to hide the truth.
The NAVs of ULIPs? underlying investments are a typical example. These NAVs are often used in the sales and the PR effort of insurance companies. However, what ULIP victims rarely understand is that unlike mutual fund NAVs, ULIP NAVs are pre-expenses. If the ULIP fund?s NAV has gone up by X per cent over a certain period, your investments would have gone up by a much smallerpercentage. The account statements of insurance companies are a masterpiece of obfuscation. In reality, it would be a simple matter to make them simple to understand. Look at it this way. For any time period, there are only a few possible inputs and outputs to the value of your investments in a ULIP.
These are: fresh money that you have deposited; investment returns generated; money deducted to pay agents? commissions; money deducted to pay the fund companies? expenses and money deducted to provide you life cover.
Conceptually, that is all. All the myriad items that customers see on an insurance company?s account statement can be reduced to these heads. I can confidently predict that if ever IRDA mandates an account statement that uses the simple terminology which I?ve stated above, then all problems will be over. Customers will see and understand the truth clearly, and they will know what to do.
?The writer is the Chief Executive Officer, Value Research