Dear Mr.DHIRENDRA KUMAR,
Thanks for your immediate response to my mail on the subject matter inspite of your pre occupation with your various activities. I am one of the constant admirer of your vies on the subject of Mutal Fund investments and a regular reader of your views on that subject.
On reading your present letter, I would like to confirm that I did not raise any of the points considered in your letter. I am also in agreement aith you on those points and I don't consider them for my arguement about criticism of SEBI's order on ULIP.
I also agree with you that upfront charges in ULIP are very high and its effect on investments is compounded for future years also since original investment gets reduced by upfront charges. My points of arguements are:
When every type of financial institutions are regulated by a specific Regulatory Body apointed by Parliament, the supreme body in a democratic set up, how it is correct for one Regulator to interfere and and seek registration of other units, when they are already regulated by another Regulator? Don't you feel that such a behaviour is not befiting of a Regulator? What will be the situation if RBI start interfering with the Money Market or liquid funds of Mutual Funds or SEBI wants to regulate banks because they are aslo pooling public funds and invest in seurities in money market as well as in equity market? It is always better that any organisation is controlled by one Regulator than by more than one. If it is so important, SEBI must have approached Finance Ministry and sought their intervention rather than taking unilateral action. When the matter is aslready taken up WITH fINANCE MINISTRY AND "SWAROOP COMMITTEE" HAS ALREADY SUBMITTED ITS FIRST REPORT regarding reduction of upfront commission on insurance policies and also on the formation of a Supreme Regulator for all financial products namely FINANCIAL WELL BEING BOARD OF INDIA[FINWEB]. The Committee's Report has also suggested that FINWEB will have two divisions namely (1) Self Regulatory Organisation [SRO] and (2) Financial Literary Cell. When these actions are already on the card the unilateral action of SEBI creats doubts about its intentions while seeking the registration of insurance companinies.
Before introduction of ULIPS there was no transparency in the insurance products investments. Though then also LIC was one of the largest institutional investor in securities, both in debt and equity, there was no feedback to the policy holders about the earning made out of the investment of their premium. Just like banks interest, LIC declared Bonus and the policy holders simply accepted it. Only after introduction of ULIP, the investment portion of policy holders' premium was invested in most transparent manner according to the wishes of the policy holders. In the first five years these policies also gave very good return to policy holders which prompted them to log in to more ULIPS. The response to ulip was so fast and good that forced even LIC to depend more on ULIP deviating from their traditional endowment policies. When TERM policies are of the least cost how much of LIC policies are term policies and not endowment policies before ULIP came into existence? If I may submit, the pure term policies were never recommended by LIC though they had only one plan for it out of their 150 and odd tables. Before ULIP, LIC was selling mostly endowment and Money back policies WHICH GAVE HARDLY 3-5% COMPOUNDE ANNUAL RETURN ONLY FOR POLICY HOLDERS. AT THAT TIME ALSO THE COMMISSION PAID TO INTERMEDIARIES WERE HIGH RANGING BETWEEN 15 - 25%. Even when the policies were surrendered first one year premium was total loss in addition to the loss in surrender value calculation in the first three years. But in ULIPS, whenever policies are surrendered the fund value is payable which accrues from first premium and as such it is better than any other endowment policies. If a policy holder uses the switch offers offered by the companies he can certaily imrove his return subject to his ability to predict the market. HERE HE CAN SWITCH FULL AMOUNT IN HIS CREDIT OR FUTURE INVESTMENT ONLY OR BOTH ACCORDING TO HIS CHOICE BUT IN MUTUAL FUND IF HE DO SO HE MAY HAVE TO FACE EXIT LOADS. Also he can invest in debt funds and still gain Tax Deduction depending upon the policy holders risk appitite, whch is not possible in ELSS.
Coming to charges on ULIP I fully agree with you that the up front charges are unduly high going upto 40% in some cases. Even LIC is charging more than 25% for initial two years. There is no justification for these high charges. It is certainly in favour of intermediaries and not in favour of policy holders. It can be brought down to 2-5% taking into account the procedures involved. It can not be Nil Upfront like MF Schemes because it invloves medical investigation charges also. Being an Insurance product it must take into account two aspects namely (1) Long Time period and (2) ADEQUATE LARGE LIFE COVER. ALSO WE MUST AVOID SINGLE PREMIUM AND TAKE MONTHLY REGULAR PREMIUM WHICH WILL ACT AS SIP FOR LONG TERM. In a long term policy the average cost per annum reduces to 3-5% only which can well be compensated through better returns compared to return on endowment policies. Please note that in Insurance Policies, charges on endowment policies are also very high including mortality charges which were averaged and collected from the first year at a rate applicable to after 15-20th year. In ULIPS mortality charges are collected on yearly basis based on age and only when the insured crosses the age of 50 his premiums are high.
If reducing the upfront charges are the only reason for SEBI to seek registration of the insurance companies, can it not be discussed with IRDA through Finance Ministry and achieve that goal? I feel this can be an easier and less time consuming method than the step adopted by SEBI.
If charges is not the criteria, but insurance companies' investment in securities is only the
criteria for seeking the registration under SEBI then it must have taken place from the date of formation of SEBI because LIC is the biggest institutional investor in this country even before the formation of SEBI. Further more there are also insurance cum pension products issued by few insurance companies in which there is no upfront load at all. For example in case of ICICI PRU LIFE STAGE PENSION ADVANTAGE THERE IS NO PREMIUM ALLOCATION CHARGE AT ALL. It means that entire premium will be invested and other chrges like fund management / policy administration, Mortality Charges and other charges only will be deducted before investment.
If SEBI is so much concerned about investors protection, don't you feel by sudden withdrawal of investment by policy holders due to the creation of panic in their mind about the future of their investment, there can be a crash in the security market by which all investors will be affected including investors in Mutual funds? The Financial Data says that more than Rs.92,000 crores are invested in securities market due to ULIP.
More than provision of employment by insurance companies, what is important is the provision of Financial Capital particularly for long term projects by the insurance companies which is most impotrtant for our economic growth.
MY SUGGESTIONS TO IMPROVE THE ULIP AS MORE INVESTOR FRIENDLY ARE:
- We must try to eliminate the bad parts of the practical followup of ULIP schemes for which the main reason is mis-selling. We must plead for minimum of 25 times and maximum of 100 times the premium payable as life cover.
- secondly the minimum period of ulip must be increased to 10years and not 1 to 5 years as it is now.
- The upfront charges must be reduced to a fixed sum for every policy depending upon the cost of medical tests involved, stamp duty payable on the sum assured etc.
- The upfront commission to intermediaries to be fixed reasonably again on a fixed sum basis rather than on a percentage of the premium.
- The trail commission should also be a fixed sum based on a certificate from the policy holder that he continues to get the service of the intermediary and he is accepting to pay this charge out of his premium. In the present mode of ECS, BILL Junction, RTGS, NEFT etc. the role of intermediary has substantially come down. His role is mostly as Financial Advisor in advising the client about switches to be made, its quantum and timing through which the investor can earn benefits and not merely as a service provider.
- For every ULIP policy, in addition to present method of getting the applicant's acknowledgement for 6% and 10% return calculations for his invetment portion, there must also be another calculation giving what will be the cost or premium for his sum assured if he take a pure term policy. Let the investor decide after taking all these details into account what he wants. Let it also state that in a ULIP the returns will depend on market performance and not an assured one.
- In my view all these steps can be taken by IRDA itself and it does not require prior registration with SEBI. There is nothing here that SEBI has to regulate.
- Let us curtail all the unwanted expenditures in the guise of product promotional and marketing expenses and try to market the investment products based on their return and other benefits to the investors.
- Let the Financial assets be marketted on the basis of their long and short term benefits and accompanying risks
- In order to achieve the above, let there be strict selection as well as monitoring of intermediaries after imparting adequate knowledge about these products.
- If possible, let us also discuss about how to fix responsibilty for intermediaries when they do misselling.
Thanking you,
CA.N.VENKATESWARAN.
Date: Tue, 20 Apr 2010 19:13:15 +0530
Subject: ULIP Excuses, and Why They Are Wrong
Dear Value Research Online Member,
There are a set of reasons that ULIP apologists usually trot out to promote ULIPs. Here's why they are wrong.
ULIP Excuses, and Why They Are Wrong
The so-called turf-war on ULIPs that SEBI and IRDA have been fighting has now taken on a life of its own. In reality, just about the least important thing is who regulates ULIPs, while the most important thing-or rather, the only important thing-is that investors understand what they are getting into and make the choices that are best for them. I find that there's a great deal of misinformation floating around about ULIPs and why exactly are so many investment advisors so critical of them. ULIP proponents generally give a set of reasons which in their opinion invalidate criticism of ULIPs.
In this article, I'd like to briefly describe why I think these arguments are not valid.
Argument: ULIP expenses have been lowered by IRDA. ULIP expenses are now down to just 3 per cent for ULIPs of up to 10 years and 2.25 per cent for longer ones. Mutual funds, by comparison, have a higher fund management charges.
Reality: The way IRDA has framed the rules, 2.25 or 3 per cent is effectively the average over the entire lifetime of a ULIP. However, these charges are heavily front-loaded, something that allows insurance companies to circumvent them easily. During the first year, these charges are as high as 40 to 70 per cent. If the customer cannot continue with a policy for any reason, then his real expenses are far higher. And as it happens, a huge proportion of policies lapse during the earlier years. The front-loading has no logic, except to enrich insurers and agents. And fund management charges being lower than mutual funds is a not a full comparison. In mutual funds, total expenses are capped at 2.25 per cent for equity funds and less for other funds. These are not comparable to the fund management charges of ULIPs because ULIP customers also pay premium allocation charges, policy administration charges, mortality charges, and for guaranteed ULIPs, guarantee charge s. Comparing fund management cha ges alone is a joke.
Argument: ULIPs have led to a massive rise in insurance penetration in India.
Reality: Insurance means insurance, in the sense when the insured person dies, his family gets money to pay for food, rent and education. In a country with as little social security as ours, the growth of insurance has to mean the growth in the reach and quantum of risk cover for lives. To call ULIPs, a market risk-bearing product (with a tiny dose of insurance) by the name of insurance and then present it as evidence of the growth of insurance is simply dishonest, and to find a regulator appointed by the Government of India participating in this subterfuge is shameful.
Argument: The insurance industry provides a huge amount of employment. 30 lakh people have found work through insurance.
Reality: If ULIPs were a sound financial product than this would be wonderful news. Since they are not (see above reasons), this issue is a complete red herring. It is not the responsibility of ULIP customers to provide agents employment by giving away vast proportion of their premiums as commission. If crores of people's money has to be mis-invested to provide employment for lakhs of people, then it's better for those lakhs to find some other, more productive employment.
Argument: ULIP fund flows are important for the stock market and for infrastructure development.
Reality: The same as the employment argument. It is not the responsibility of ULIP customers to buy expensive and non-transparent investment products so that the stock markets can be boosted. Wouldn't it be possible to create infrastructure if ULIPs could be made more investor friendly.
I find the last two points to be particularly dishonest. They somehow imply that if ULIPs were made more investor-friendly, then lakhs of people would immediately become unemployed and money would stop flowing into development. However, ULIP critics like me have nothing against the concept of ULIPs. If ULIP cost is brought down and made non-front-loaded; and if transparency is enhanced to the level of other asset classes, then they would be a very good product. The fact that the ULIP's enforce gradual SIP-style investments could actually make them a superior product.
ULIPs should be converted into a product that has an investment component that has similar rules and regulations to mutual funds, in combination with an life-cover component that has the same pricing as term insurance. If this happens, then I'm sure that every opponent of ULIPs, including Value Research, will start recommending them above mutual funds.
-- Dhirendra Kumar
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