The insurance regulator has issued a directive prohibiting insurance companies from promoting Unit Linked Insurance Plans (ULIPs) solely as investment vehicles.
According to a master circular by the Insurance Regulatory and Development Authority of India (IRDAI), advertisements for unit-linked insurance products, index linked products, and annuity products with variable annuity pay-out options must include comprehensive, accurate, clear, and updated information presented in straightforward language.
ULIPs are hybrid financial instruments that combine life insurance coverage with investment opportunities. A portion of the premium paid towards ULIPs is allocated to life insurance coverage, while the remainder is invested in a diversified portfolio of equities, bonds, or a blend of both, as detailed in a CNBC TV18 report.
Reasons behind the new regulations stem from insurers introducing new small and mid-cap fund options under existing ULIPs throughout last year. However, the absence of the term ‘insurance’ in many advertisements led to confusion, with consumers mistaking these products for mutual fund schemes, noted Moneycontrol.
The IRDAI mandates that advertisements featuring past fund performances must disclose compounded annual returns for the preceding five calendar years, accompanied by a disclaimer stating that past performance does not guarantee future results. Additionally, if applicable, benchmarks of index performance should be provided alongside fund performance data, according to the Times of India.
Insurance companies are now required to establish an advertisement committee and appoint compliance officers to ensure stringent oversight of advertisement content.
Moreover, the regulator has instructed insurers to offer policyholders the option to make premium payments online or appoint a new agent or direct sales staff in the event that the selling agent departs from the company. The regulator permits renewal commissions to be paid to the new agent and allows insurers to accept new policies from the assigned insurance agent or direct sales staff for the same policyholder if the assigned policy lapses or is surrendered within six months.
The advantages and disadvantages of ULIPs are delineated as follows in the CNBC TV18 article:
Advantages:
Dual Benefit: ULIPs provide life insurance coverage alongside opportunities to invest in various asset classes, appealing to those seeking comprehensive financial solutions.
Flexibility: ULIPs offer flexibility in switching between different fund options, enabling policyholders to adjust investment strategies based on market conditions.
Disadvantages:
Charges: ULIPs encompass several charges such as premium allocation charges, policy administration charges, and fund management charges, which can impact overall returns.
Market Risk: The investment component of ULIPs is exposed to market risks, and returns are not guaranteed.
Lock-in Period: ULIPs impose a mandatory lock-in period of five years, during which partial or complete withdrawals are not permitted, limiting liquidity and rendering ULIPs less suitable for those requiring quick access to funds.
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