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Insurance products are not the ideal instruments for investment. They are meant to offer risk protection. But Unit Linked Insurance Plans (Ulips) offered by life insurance companies have an investment component as well. Those selling Ulips point out the combined features of tax exemption, life insurance and returns from investment as benefits.
After several cases of mis-selling, where policyholders lost money heavily, Insurance Regulatory and Development Authority of India (Irdai) imposed caps on the charges and commissions on Ulips. Now, the latest draft guideline proposes to make exposure to government securities (G-Secs) mandatory for Ulip investments. Will this make Ulips safer? Or it lead to lower returns?
One of the proposals, in the draft guidelines released last week, says Ulips should have minimum 25 per cent exposure to G-Secs. It is not clear whether this is for each Ulip fund or all Ulip funds put together. Currently, insurance companies offer debt, hybrid and equity funds in Ulips. But if each fund is mandated to have a 25 per cent exposure to G-Secs, there will be no pure equity funds.
“If this proposal is implemented it will affect the sales proposition for Ulips. For investors who want 100 per cent equity exposure, it could become difficult for companies to structure such funds,”' says Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance.
From the point of view of returns, when equity markets are down or flat, G-Sec exposure is good, as it will provide some cushion. In a scenario where equity markets are rising, then 100 per cent equities exposure can help generate higher returns.
The impact on returns might not be very substantial, because only in a secular upturn would the gains get impacted by having exposure to G-Secs. However, sales of Ulips could become more difficult, Srivastava points out. But in case of a secular downturn, G-Secs could provide cushion. Ulips are more sophisticated instruments, allowing choice to individuals. For those seeking safer avenues, there are traditional products like endowment and money-back policies.
Ideally, a policyholder should be given the choice to invest in any fund he/she chooses, says Yashish Dahiya, CEO & co-founder, Policybazaar.com. "Debt funds in Ulips have become popular only recently. People who usually put money in Ulips do so because they want equity exposure. Forcing companies to invest in certain types of securities is not a consumer friendly measure. Customers are likely to get better returns by investing in equities over a long period of time,” he says.
Insurance company officials point out that the option to invest in G-Secs already exists, as policyholders can choose between debt funds or hybrid funds. Then, what is the need to impose this restriction on equity funds as well? While the G-Sec exposure might make the Ulip safer, it will lead to a compromise in returns.
Ulips are always compared to mutual funds, based on the net asset value (NAV). But with this rule, that comparison will not be possible, says the head of investments of another private life insurance company. MFs will have more choice.
“While you are indirectly saying that capital is protected, it does not mean that returns will not come down,” he points out. Currently, insurance companies are allowed to invest in approved securities. This includes bonds that are rated ‘AA’ and higher, bonds that are secured by some asset. On the equity side, Ulips can invest in companies that have a track record of paying four per cent dividend for at least nine years, a restriction that mutual funds don’t have.
"Now Ulips are on a par with MFs, as the charges (in case of Ulips) are capped at 1-1.5 per cent and they also offer tax benefit. But any restriction on flexibility will reduce the attractiveness of that instrument,'' says Naval Goel- Founder & CEO PolicyX.com.
