Thursday, April 7, 2011

Are ULIPs becoming Obsolete?

Well, you might think I am crazy to ask such a question and I would be surprised if you dint… yes, you read the title right, are Unit Linked Insurance Plans becoming Obsolete?

The purpose of this article is not to tell you what an ULIP is or whether to invest in ULIPs or not. I have already dedicated a few of my older articles to do just that. You may want to visit them to understand them better.

1. Introduction to ULIPs
2. Can ULIPs Really Guarantee Returns

Are ULIPs Really getting Obsolete?

It has been a testing time for all equity market investors world wide. The stock markets are volatile and people are cautious before they invest their hard earned money in stocks. But, at the end of the day, stock market instruments are still one of the best preferred investment options for everyone.

But, it is such testing times that can spell the doom for certain investment options. In this case ULIPs or Unit Linked Insurance Plans.

Insurance Agents have been selling ULIPs like crazy and People have been buying them for years. In the past few months, Equity investments made by insurance companies went downwards, as policyholders surrendered some unprofitable old ones to shift to more attractive new products. To add to the woes of the ULIP sellers, regulatory changes did not help either.

The net investment from Insurance companies in the Stock markets was over Rs. 34,000 crores last year (i.e., They received that much money as ULIP premium) whereas this year in the first 3 months, they have invested a net of only around Rs. 3000 crores. More than 50% down than what they invested in a similar timeframe last year.

Per, last years numbers, by the end of March 2011, the insurance companies should have invested Rs. 8000 crores in order to atleast reach the numbers they achieved last year, but unfortunately they are not even 50% close to it.

This is because:
1. A lot of people surrendered their ULIP policies they had invested a few years back
2. People are not willing to buy new ULIPs because the existing ones haven’t lived up to their promises
3. People have started preferring traditional insurance policies rather than ULIPs

I personally have not been a big fan of ULIPs and you might have sensed it, if you are a regular reader of my blog. Even though I am not a big fan, atleast for the benefit of my readers like you, it is my duty to analyze what went wrong for ULIPs. Isn’t it?

What Went Wrong?

Well, the reasons are numerous. Let us look at them one by one…

1. ULIPs are not Magical Investment Instruments

This is true. ULIP is nothing but a combination of Mutual Funds and Traditional Insurance policies. Unfortunately the Agents who sold these ULIPs and the companies that floated them, did not explain the ground reality to their investors. Every insurance agent in town went around with extraordinary projected returns, extrapolated for the next 10 or 15 years. Unfortunately, our Insurance advisors conveniently forgot that the equity market is not an upward moving machine and the equity markets lived up to their reputation. The past 3-4 years have been extremely uncertain and people have realized that, their net investments are not even worth what they invested.

So, people have started surrendering their ULIP policies as soon as the lock-in period of 3 or 5 years are over.

To Meet the Surrender Demand, Insurance companies are forced to sell their holdings or divert the fresh inflows to pay off customers.

This is the biggest reason for their downfall – Promising Unachievable or Impossible Returns to Investors and Failing to Achieve them!!!

2. OverSelling ULIPs

Any product that is over-sold usually goes out of favour in due course of time. When ULIPs were introduced as a revolutionary investment option, every tom dick and harry was selling them and naive investors were buying them just like crazy. And as time went by and the craze started to fall off, the reality struck the investors and because they did not perform as well as they were supposed to, people started selling as well as avoiding them.

3. Profit Involved

ULIPs have been a very profitable instrument for the companies that floated them and the agents that sold them. The same cannot be said about the investors who bought them. ULIPs have the highest commission margin for agents that sold them and the highest expense ratio among equity investment instruments for the Insurance companies. Everyone made merry by selling them while the investors who bought them weren’t having so much fun.

4. Regulatory Concerns

The Equity Market Regulators (SEBI) and Insurance Regulators (IRDA) realized the fact that insurance companies were making a killing by selling these products and by not disclosing all facts concerning them. Investors were even given pamphlets that said how much their money would be worth over the next 5 or 10 years. When the regulators realized this, they started tightening the noose on the rules related to these hybrid investment products and when the free-run was no longer possible, insurance companies had to disclose all concerned facts which made ULIPs less and less desirable among investors

5. Lesser Profits for Agents

Because of heavy competition, insurance cos were forced to reduce their margin on ULIPs. They did so by cutting on the commission they paid to the agents who sold these policies. An agent who used to get upto Rs. 45000 for a policy investment of Rs. 1 lakh by an investor 3 years ago, gets less than 10% of the same today. Making it a not so profitable sale prospect for the agents and eventually the agents are not as excited as they were before to sell them today.

6. The Lock-In Period

ULIPs are long term investment options. They come with a basic lock-in period of 5 years or more. Investors have no choice but to keep investing for 5 or more years even if the ULIP they chose was sinking. Considering the high expenses & fees involved with ULIPs and also considering the fact that the equity markets were choppy, investors realized the fact that, the current value of their investments at the end of 5 years is lesser than what they had actually invested, they started surrendering their investments. This resulted in huge losses for the insurance companies that sold them.

Did Investors Make a Mistake?

If you ask me, the answer is YES. A big YES. It is the responsibility of the investor to perform proper due diligence before locking in money for such long durations (5 years or more) By believing whatever was told to them by the agents, people invested vast sums of their savings into these products and ended up burning their fingers.

After all, every single action we do has a monetary repercussion. People sell things to make a profit and I wouldn't blame the insurance cos or the agents for selling them like pancakes because they were making solid gains by selling them. It was the responsibility of the person who bought it to be careful, when that doesn't happen, people stop buying and that is exactly what has happened!!!

That's it for this article folks…

Happy Investing!!!


  1. Investors should stay away from ULIPS and keep insurance and investment different...
    For insurance buy a term plan and for investment go for Mutual Funds etc...

    Stay away from ULIP's..

    Very nice article...

    Salil Dhawan

  2. A very very true article....
    I also feel that insurance and Investment should be keep different.
    I truly owe you Anand.Your articles are really helpful in investment.So pls keep writing for the sake of others.Thank you very much.

  3. @Yogesh - thanks man. Appreciate the comment :)

  4. hi i'm new to this blog i'm no anti or pro ULIPS i had invested in three hdfc ulips the charges were to high that time but surprisingly all those ulips gave me 40% returns year on year basis,plus i had a cover for life.and then i felt i was tied to this ULIPS thing since you had to pay for 3 long years from 2006/2007 onwards,i noted that i was forced to pay,hence it was force investment/savings,im sharing my ernest views,regardless of what ever, i think term cover is very important but follow it up with proper documentation else companies WIll do their best to not give you your insurance in an uneventful happening.I have now invested in hdfc crest aginst my own conviction,you might say im confused but i say why not have a contrarian view.good luck all

  5. Interesting article...

    only 1 point: in my opinion, the advisor margin reduction was due largely to IRDA regulations which mandated a reduction in the charges being charged from customers



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