IRDA bans ULPs it cleared a year ago!  

October 22, 2010

IRDA has finally woken up to the ill-effects of ULPs, which we again highlighted four days ago. The question to ask is why these products were even allowed in the market? It gave insurers ample time to make a killing by charging 80% premium allocation charge in the first year as in the case of Reliance

One would think that 80% premium allocation charge in the first year would ring alarm bells with the regulator, but the Insurance Regulatory and Development Authority (IRDA) had approved one such universal life policy (ULP), launched less than a year ago. It is Reliance Super InvestAssure Plan which had 80% premium allocation charge for the first year premium.

But ULPs, which were being promoted as an alternative to unit-linked insurance plans (ULIPs) had a field day for a year. Yesterday IRDA announced an overnight ban on all ULPs. In the past IRDA gave advance notice to insurers, but companies have taken undue advantage of this and have pushed these products by positioning them as a "limited period offer".

"After examining the complaints, the authority is satisfied that universal life products need a better regulatory framework for protecting policyholders' interests," IRDA said. Interestingly, Moneylife had reported just four days ago on 18th October that IRDA will go after toxic ULPs; Reliance will be hit the most. (See: http://www.moneylife.in/article/76/10112.html).

ULPs come mainly from four companies - Max New York Life, Aviva Life, Bharti Axa Life and Reliance Life. Companies had built in high commissions into these plans. In a way, they contain the shortcomings of both traditional plans and ULIPs - high costs and pathetic returns.

Reliance Super InvestAssure Plan had 80% allocation charge for first year premium while Max New York Life Secure Dreams plan had 30% of the same. There are additional charges like policy administration charge and fund management charges that eat into investor premium.

According to industry sources, insurers anticipated that IRDA would order ULPs to be wound up effective from the end of year. This anticipation only prompted them to go all out and push this toxic product with even more vigour. It happened for ULIPs and now for ULPs. It will happen again in the future unless IRDA is proactive and not reactive.— Raj Pradhan