Evolution of ULIPs over the years

“You learn so much about a business in the months before launch, but your education really begins on the day you open doors to your customers.” – Richard Branson

The very first and centre for any product evolution, across industries, is to provide more value to the customers. It is a constant process of change that helps one take maximum advantage of the changing environment and customer requirements. Just like any other product in the market, financial products have also evolved over the years from being just a simple saving an instrument to more sophisticated tools for creating wealth and assets.

The same is the story of 4G ULIPs (Unit Linked Insurance Plan) which have come out with a sea of change and eradicated almost all pain points of the older version of ULIPs. From being a reviled product due to their inflated cost structure and ambiguity, ULIPs are now being promoted as low-cost vehicles for those willing to invest in market-linked products.

First Avatar of ULIPs (Prior to 2010)

ULIP’s were first introduced by UTI in 1971 as an effective financial tool with guaranteed additional cover. But due to high front-loaded charges and other charges by distributors and agents, its acceptance got hollow with time. Also, because of the lack of transparency in the product, the disappointment of policyholders intensified after they realised that a major part of the premium that they have paid has gone mostly into the disbursement of commissions charged by the agents and very less amount was invested in their net fund value. This led to low persistency ratio of continuing to invest in ULIPs giving rise to a high number of policy lapses. Secondly, distributors tricked customers into buying the products by making them believe that the investment included paying premiums for only three years, instead of continuing to pay for the full policy term that could help them earn good returns.

The Second Transition of ULIPs (2010-2015)

After realising the cause, the Insurance Regulatory and Development Authority of India (IRDAI) woke up to this menace and attained the need to formulate and execute necessary guidelines with a view to protecting the policyholders' interests. The regulations mainly aimed at educating customers about the significance of their investments into ULIPs by bringing down charges and ensuring that policyholders understand ULIPs as long-term products. IRDAI capped the annualised charges of ULIPs at 2.25% for the first 10 years of holding and increased the lock-in period to 5 years. The charges were fixed at this rate because it was the average cost charged by competing products such as mutual funds. Also, there was an increase in the minimum cover to ensure an appropriate insurance cover to protect the investors’ financial interest.

Entry of 3G ULIPs in the Market (2015-2017)

Till 2015, most ULIPs worked more or less on the same pattern. The real change, however, began with the launch of low-cost ULIPs in 2015, including the online version, which addressed the transparency-related concerns of customers. As the charge structure of both policy administration and policy allocation charges associated with ULIPs underwent a major change with the unveiling of HDFC Life Click2Invest. The rest of the costs including mortality charges and fund management charges were capped to about 1.45 per cent. A similar plan, SBI LIFE — eWealth Insurance limited its premium allocation charges to Rs 45 in the first year only, removed its policy administration charges, while the total of mortality charges and fund management charges were limited to roughly 1.25-1.50 per cent of the annual premium paid.

4G ULIPs - A New Approach to Launch Excellence (2017 and continuing)

The journey of ULIPs has been a steady one. It has come a long way from its reputation of being a mis-sold product to being as transparent as the other financial products in the market. From the time they were introduced in the early 2000s to where they have reached today, these products have become a value-packed proposition for the customers. The ULIPs are now smart, investor-friendly, more transparent, cost and the tax-efficient. With new guidelines such as increasing disclosures, minimum lock-in period increased to 5 years and commissions capped, the new age ULIPs have become a better financial product.

If you think about it, it’s a sort of a misconception now because people have the old memories about non-transparency in ULIPs but today if you look at the online ULIPs everything is available at the click of a mouse. And on a monthly basis, insurance companies publish their factsheet which discloses their entire portfolio where all expenses are clearly stated upfront. The charges of ULIPs were brought down and spread out evenly over the tenure of the policy and the disclosures were more detailed for the benefit of investors. To attract customers, insurers decided to remove policy administration and premium allocation charges completely. And the investors get the mortality charge back once the plan matures, indicating ULIP as a unique investment option with a free life cover. Also with time, FMS charges got capped at 1.35% per annum.

Amongst the latest entrants in the sphere of low-cost ULIPs, Edelweiss Tokio’s Wealth Plus has done away with the premium allocation as well as policy administration charges. With a product that ‘returns’ the mortality charges at maturity, Bajaj Allianz Life’s Goal Assure would appeal to such investors.

ULIP also provide customers with the flexibility to choose their asset allocation between equity and debt, depending on their risk appetite. In fact, the customer has the option to choose their investment in 100 % equity or debt. Further, many insurance companies do not even levy charges for switching between the funds. After 5 years the policyholder can choose to withdraw their investments partially or fully.

With careful planning over the years, the wealth created from ULIPs can be used for the child’s higher education or other requirements like retirement planning. For a consumer, if you are putting Rs 15,000 per month for 10 years and stay invested for 20 years, you would probably accumulate around Rs 60 lacs at the rate of 8%, which is a lot of money when the power of compounding works on your investment and will work well for your wealth creation. 

(The author Santosh Agarwal is the Chief Business Officer- Life Insurance, Policybazaar.com. The views in the article are her own and do not reflect those of DNA)