ULIP plans or Unit Linked Insurance Plans which took the insurance industry by storm few years ago are now marked as out of fashion or faded away. Or is it so? Few years back when they were first introduced insurance companies through agents marketed unit linked plans throughout the country on a massive scale and sold them to many people in the form of better life insurance plans, better investment plans, better child plans, better childrens plans. During this period, a person who was interested in a safer investment plan was told about unit linked policies by insurance agents that the person ended up buying ULIP investment plan.
But, today, there are hardly any sales for ULIP in India. Recent market trends show that ULIP sales have fallen down to 50% in one year. People must be asking, how did an insurance plan which was so popularized suddenly fall in sales by 50%, in no just one insurance company, but among the whole insurance industry. One of the major reasons attributed to the fall in sales are due to the rules and regulations passed by IRDA (Insurance Regulatory Development Authority). IRDA is the apex body in Insurance in India which passes rules and regulations from time to time.
In early 2011, the IRDA has passed down rules and regulations concerning ULIP in India. according to those rules, various charges on unit linked plans have been capped by IRDA. The capping of charges by insurance companies have removed the incentive for selling ULIP in India.
But first, if we look how these ULIP investment plans in insurance companies work, we can understand why ULIP in India have fallen down by as much as 50%. As we all know that unit linked policies are very similar to mutual funds. They are insurance policies with investment in stock market. This gave them a dual effect of both investment and insurance in one go. Premiums paid by the investor were divided into units similar to mutual funds that ate invested in stock market. The average life of long term unit linked policies ranged between 15 years to 20 years. But, there were many charges that were being deducted from premiums which included premium allocation charges, administration charges, policy administration charges, fund management charges, etc apart from the commission to agent was also included. This meant that great share of premiums paid by investor were being deducted by insurance companies. Typically, in a 15 to 20 year unit linked policy the investor three years premiums were deducted as charges under various heads. As the commission for ULIP in India was higher in comparison to regular insurance policies, many insurance agents were selling only ULIPs.
The IRDA had decreased these charges drastically and capped them at 4.5% per annum for first five years. For the next ten years it was reduced to 3% and the rest of the period to 2%. This removed all the incentive from ULIP investment plans. Today, not many insurance agents are ready to sell ULIP plans as they yield no commission to them. But, investing in ULIPs is a good idea from consumers point of view because one can get benefits of both insurance and long term investment with tax deduction benefit also, which is very profitable.