Last week, there was a spate of stories in the media about how IRDA is about to unleash a wave of reforms upon ULIPs. It seems the insurance regulator has suddenly discovered a number of basic problems in ULIPs and it has decided to fix them. Of course, these intentions have only been expressed off-the-record to select journalists.
The thrust of these ‘reforms’ seems to be to prevent ULIP investors from exiting early. Instead of three years, they’ll have to wait for at least five years to exit partially, and up to 10 years to exit completely. It seems that seven or eight years after ULIPs became a major product category, IRDA has discovered that when investors exit early they lose a huge chunk of their money.
I can only wonder how the regulator missed something that was common knowledge to everyone else in the financial community for so long.
Interestingly, some reports last week mentioned another reform that could transform ULIPs into a truly beneficial type of investment. This would be the application of all charges and expenses uniformly through the life of the investment. If an insurance company is allowed to charge 3 per cent total expenses over a 10-year ULIP, it must stay within that limit every year, instead of averaging the amount over the full term.
Such a reform would likely align the sellers’ interest with the buyers’. At one stroke, it would clear away almost all the negatives in ULIPs. I fully expect that this particular reform won’t actually happen. But if it does, no investment analyst would hesitate to recommend ULIPs.
Of course, any of these reforms, if and when they happen, will only pertain to fresh investments in ULIPs launched after the rules are changed. Existing ULIP investors will continue to pay a heavy price because IRDA has only woken up now. Of course, it has actually not woken up yet — it has only told a few journalists (off the record) that it’s planning to wake up real soon now.