Just few days back, in one of our editions of 5 minute wrap up, we wrote why investors should stay away from unit linked insurance plans (ULIPs). As the investment return for ULIPs is linked to equity and debt markets in general, they are likely to find a flavor amongst investors again. Hence, in our effort to educate investors, we thought of highlighting our stand on this issue one more time.
In simple words, ULIPs are bundled products that provide benefits of both insurance and investment under a single roof. They prospered in India when equity markets started soaring. And investors started lapping up the policies in the hope of making high return from an investment. Insurance benefit was considered a top up option. What created a further euphoria around the product was heavy marketing campaign carried out by the distributors. These distributors basically hard sold the product to gullible investors by showing them the higher return bait. And investors before understanding the high risk nature of the product lapped on to it with a hope of higher returns. But when the markets crashed NAVs fell and investors incurred huge losses. Afterwards, the ULIP market crashed.
A high commission structure which resulted in mis-selling was responsible for a fall out as well. However, since then the regulatory authorities have taken corrective action and have lowered the commission charges of the agents.
So, does a change in the commission structure and rising equity markets make a case for investing in ULIPs?
Our answer is - No. Combining insurance and investment needs can lead to wrong assessment of risk factors and mis-allocation of capital. As an example, how would you justify a ULIP investment for a retired individual? Since, he is retired; his insurance needs are probably low. Also, his investment should be tilted towards government bonds or annuity products that provide stable income. But ULIPs do not provide him the exposure he wants. He gets an insurance protection probably when he doesn't need any and his plan may contain exposure to equities which may be un- warranted.
The bottom line is uninformed exposure to ULIPs can create unfavorable outcomes. ULIPs are probably investment products being sold under the garb of insurance. But insurance and investment are separate needs. Investments are made to maximize returns. However, insurance is never bought for return but safety. Both have different purpose, time horizon and risk element. Hence, combining both is not the right approach for investors.