Saturday, December 8, 2012

For investors or govt?


This article was originally published in Postnoon on December 7, 2012
http://postnoon.com/2012/12/07/for-investors-or-govt/92810

"So Life Insurance Corporation (LIC) of India is launching a new Unit Linked Insurance Plan (ULIP)?" asked Srikanth.
"Yes. So the newspapers and news channels have reported", I replied.

Srikanth: I remember, ULIPs were really popular a couple of years back. Everyone was talking about it, investing in it. Then suddenly, they disappeared from the investments arena. Why? What happened?
Me: Well, as the regulations stood way back in 2010, the costs to the investors were huge in the case of ULIPs. The distributors and agents got large selling commissions, as high as 40% of the first year premium, and hence many of them pushed the product, mis-informed and mis-sold it to the investors.

Srikanth: Wow...isn't that wrong?

Me: It is. Hence the investors protested, once they realized that they had a product which was a sure way to lose money. Following the protests and a legal battle with the capital markets' regulator, SEBI, the Insurance Regulatory and Development Authority (IRDA), brought in new regulations regarding the costs and losses in the event an investor fails to pay subsequent premium installments. After this, ULIPs did not remain as lucrative for the agents as they were earlier. Hence they stopped pushing it to the investors. And the sheen faded.
Srikanth: Legal battle with SEBI?

Me: Yeah, SEBI claimed that ULIPs were Mutual Funds being sold as Insurance and hence they should have jurisdiction over ULIPs. Anyways, the result was a set of new regulations, which brought down the charges for the investors and increased the minimum lock-in period of ULIPS from three years to five years.
Earlier, most of the insurers charged higher during the initial years of the plan. But now, the charges have to be distributed evenly over all the years of the lock-in period. IRDA also mandated a minimum mortality cover and a minimum guaranteed return. The charges are capped between 2.25% to 4%.

Srikanth: That's good for the investors. But not for the insurers and the distributors.

Me: That's the reason the share of ULIPs has only gone downhill since 2010. LIC is now coming out with a ULIP product after almost two years. And even that may not be with the investors' in mind. As Vivek Kaul points out in his article on www.firstpost.com, it could just be a ploy to help the government raise money through divestment. Since the investor's may not be willing to pick up stocks in PSUs, LIC will bail out the government by picking up stake in those companies.
Srikanth: But why launch a ULIP product for it?

Me: That's because the premiums collected through traditional plans cannot be invested in the Equity markets completely. There is a cap of 15% on equity exposure for the traditional plans, according to the Insurance Act. However, in the case of ULIPs, the entire premium can be invested in equities.
Srikanth: Ah, so basically LIC may be hoodwinking the investors, in order to help the government.

Me: Hmmm...I did not think in that direction earlier. But after reading Vive Kaul's article, I feel that may be the real story! Ultimately, the investors must do their homework before making any investment decision!
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