The paradox of ULIPs

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: Rs 1 lakh when a fund’s NAV is Rs 22, then it will be worth Rs 2 lakh when the fund’s NAV is Rs 44. That’s it. The arithmetic of insurance companies is different. ULIP’s NAVs are effectively pre-deduction. The NAV may double, but your investments won’t double because the insurance company will reduce the number of units you hold to pay for expenses, commissions, etc. This means that the announced NAV has no clear and transparent relation to what the unit holders are actually earning.

However, ULIPs are phenomenally successful. News reports say that last year, a total of Rs 55,000 crore was invested (if invested is the right word) in ULIPs. In the same period, around Rs 16,000 crore was invested in mutual funds. We are often told by the insurance industry that this is because ULIPs are a superior product. That’s complete rubbish. ULIPs are successful because the ultra-high commissions and charges make insurance agents far more aggressive salesmen than those of any other financial products. These charges also enable insurance companies to spend far more on advertising. All of which is the unitholders’ money. The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office and many other asset types is ending up in ULIPs, where a good proportion is diverted to pay commissions.

The direction that the Indian insurance industry has taken in the last few years is a huge regulatory failure on the part of the government. This industry was opened up to foreign capital and provided with a relatively lenient regulatory framework so that it could bring insurance to India’s under-insured masses. Instead, it has ended up focussing its energies (and capital) on selling expensive and opaque mutual funds that are dressed up as insurance. It’s tragic that there is no move to even recognise that this problem exists. Now, even higher foreign ownership is on its way, supposedly because more capital is needed to ULIP the under-ULIPed masses even harder.

It simply isn’t in anyone’s interest to bring up these issues. Most large mutual fund companies aren’t bothered either because they are part of financial conglomerates that have flourishing insurance businesses.

It’s up to you, as an investor, to understand the issues and do what you think is in your best interest.