There used to be a time when the National Savings schemes, PPF and the post office schemes, apart from bank deposits, were the main avenues of investments for the future. Insurance was essentially sold more as a tax-saving instrument. The main trigger for buying insurance was essentially risk coverage (of death). Then came mutual funds to unleash the power of the market, followed by the ?hybrid? Ulips. Some of the recent debates on the ?nature? of Ulips and who should regulate such market-impacting instruments has seen a flurry of fiats by the regulators. As the industry matures, it is increasingly attracting a higher degree of interest and concern from regulatory bodies and rightly so. In a nation where financial literacy is still very low and financial planning advice still discretionary (not mandated by statute), it is only to be expected that the consumers require intervention by the regulator!?
At the core of the discussions is unit-linked insurance plans or Ulip, a product that was introduced in the Indian life insurance market not too long ago. An Ulip is a life insurance solution that provides twin benefits?risk protection and investment opportunity. Investment is denoted as units and is represented by the NAV (net asset value). Policy value at any time varies according to the value of the underlying assets at the time.
In a Ulip, the invested amount of the premiums, after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders, are pooled together to form a Unit fund. The returns in a Ulip depend on the performance of the fund in the capital market. In other words, the ultimate return on these are not assured, and the investment risk is generally borne by the investor. Ulip investors have the option of investing across various schemes, i.e., diversified equity funds, balanced funds, debt funds etc. For the consumer, these are very costly products as it involves complex layers of hidden charges that impact an equitable return to the customer.
Misselling too has become the norm of the day as agents would get their commissions within the initial years and as per Irda data, these agents would switch insurers nearly every year and make more money for themselves. Problems of abandoned & surrendered policies is an outcome of such practices.
So, should one kill the golden goose, which apart from bringing in millions of consumers into the insurance fold (increased penetration) has broadened the financial products market, encouraged consumers to look at insurance as a product that can serve the twin purpose of risk coverage & investment returns and in that sense played a part in financial inclusion. India is an underinsured country and with the government attempting to restrict itself to laying the policy for financial inclusion, it has to be a combination of the key stakeholders, regulators, markets and consumers that should determine the rules of the game through a judicious mix of guidelines, disclosures on products and continuous education on financial products.