Ulips: re-made in India

Armed with basic knowledge of an Excel sheet and some dribbles of wisdom after a basic capital markets course, when I opened a unit-linked insurance plan (Ulip) brochure five years ago and tried to do the math, I fell off my chair. The sheet showed me a product that was so inherently unfair and loaded against the investor that I thought I had mis-understood it. But long hours spent decoding various products (with lots of work put in by a trainee who is now India’s ace insurance reporter and works in Mint) told me that the conclusion was right: The Ulip product was a trap. What do you call a product that allows the entire first-year investment to be used as cost? What do you call a product that swallows the entire first- and second-year investment if you dare stop funding the product? What do you call a product that pushes forward a lifetime of costs in the first two years and then pushes you to exit—leaving your money behind? All those who were mis-sold the Ulip product in the last few years are now understanding the extent of the fraud.

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When I argued with insurance companies, the association, the regulator (current and past) about this, it was like hitting a wall. After the initial rounds of saying that journalists should not be asking these questions, the arguments went beyond the excel sheet—they did not want to discuss the math. They wanted to discuss the history of insurance, their selective view of international insurance practices, the livelihood of agents and profits of companies! The message was this: In the interest of the livelihood of agents and profits of companies, the consumer should keep buying these harmful products. And, oh, look, we give a 15-day free-look period, we’re investor-friendly.

Various attempts to nudge the industry and regulator towards a more investor-friendly regulatory system failed. But by the beginning of 2010, the noise made by people who were mis-sold or fraudulently sold these products was too loud to ignore. I know of letters reaching the ministry of finance every day addressed to the finance minister complaining about such mis-sales. Some of them, it seems, he read. Concurrently, the capital market regulator brought the issue out of the closet by going to court against the insurance companies who were selling mutual funds in the garb of insurance products. In the dust-up that ensued, the victory ostensibly went to the insurance regulator, but the nudge to reform insurance became a push. Almost immediately after the June ordinance that ruled in favour of the Insurance Regulatory and Development Authority (Irda), the regulator came out with a set of rules that have genuinely attempted to correct the flaws in the Ulip. From today, 1 September 2010, the new Ulip that hits the market will no longer be a trap. Total costs are capped and staggered. Lapsation will no longer be a crime punishable by a total loss; the maximum loss is capped at Rs6,000.

Where Irda left off, the Direct Taxes Code took off. Unless the lobbies ensure otherwise, from 1 April 2012, insurance products will no longer qualify for the Rs1 lakh deduction (currently under section 80C) from taxable income. Instead they will be eligible for a maximum of Rs50,000 deduction, but the life cover will have to be at least 20 times the premium. This means a premium of Rs1 lakh would need a minimum life cover of Rs20 lakh—not too much, but better than the 1% crust of insurance the old product carried.

So what now? The blanket ban that I imposed on my family, friends, readers and viewers buying a Ulip still stays. Today is the first day of a new world that is fairer to the investor than it was yesterday. Let’s wait for the products to come to see if companies are following the regulation in spirit or are still checking boxes. The rules are now fair. The market has to now see what the insurance companies will do with these rules. What about those who were trapped into the Ulip product in the past few years? If you believe you were mis-sold the product, protest. Loudly. Write to the company, write to the regulator, call the toll-free helpline, make as much noise as you can. The informal message out in some insurance companies is this: settle with all those who protest loudly or have connections with the powers that be.

End note: The older fund houses are drumming up support against changes being brought about by the capital market regulator. Those who would not speak even when spoken to are now actively seeking meetings and passing around cell numbers to journos. In a post-1 September world, the big tilt in favour of Ulips is gone.

This will go further over the next two years. Mutual funds now need to stop bleating and get on with drawing retail investors in. The field is levelled, the costs are down, the investors are ready—can we have some action in the market now?

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and can be reached at expenseaccount@livemint.com