The unit-linked insurance plans (ULIPs) caught investor attention in the last few years. The assets under management (AUM) of ULIP schemes have grown many times over the last 7-8 years. ULIPs are regulated by the insurance regulator IRDA.
Recently, the SEBI issued an order banning insurers from launching new ULIPs without prior registration with it. The SEBI argued that ULIPs invest a significant portion of their AUMs in equity and equity-related instruments, and therefore they are similar to any other mutual fund product that offers investments in market instruments. On the other hand, the IRDA argued that the predominant feature of an ULIP is insurance cover and therefore registration with IRDA is sufficient to launch new policies.
Here's what triggered the debate over the current framework of ULIP policies:
Structure and charges
One major concern is the complicated structure and transparency of various charges imposed by insurance companies on ULIP investors. There is no uniform set of guidelines for these charges. On the other hand, SEBI has brought in many new regulations in the mutual fund industry to channelise the various charges for the benefit of investors.
Premium and commission
High distribution commission and premium allocation charge is another area of contention for the ULIPs in comparison to mutual funds.
No need to panic
The dispute has triggered some panic in the market. There are various rumours floating in the market that ULIP products have been banned by the regulators.
However, investors should have patience as the AUM managed by the insurance companies under ULIPs is quite significant.
Existing ULIP investors
The existing ULIP investors should not worry with the current dispute over the regulatory framework. There is absolutely no risk of safety of investments. However, the current dispute might result in some basic changes in the ULIP regulations. These changes in ULIP regulations are expected to benefit ULIP investors (existing as well as new investors).
Also, a premature exit by existing investors based on market rumours and panic would seriously hurt them by way of high penalty charges imposed by the insurance companies to terminate the ULIPs before maturity.
Changes good for investors
To sum up, the current SEBI-IRDA regulatory tussle would bring out the best for investors. Analysts believe the resolution from this dispute will tighten the regulations for ULIPs and better channelise the various charges imposed by insurance companies. Overall, it is expected to increase the efficiency of the ULIP policies in terms of management of money and providing life cover.
