Regulator acts like an industry association; IRDA promotes ULIPs!
March 19, 2010
Can you imagine the Reserve Bank of India (RBI) hard-selling recurring deposit schemes of banks or the Securities and Exchange Board of India (SEBI) bombarding investors with ads asking them to buy infrastructure funds? That is exactly what the Insurance Regulatory and Development Authority (IRDA) is doing.
IRDA recently launched an advertising campaign promoting unit-linked insurance plans (ULIPs) for pensions. The ads seek to educate investors of the benefits of ULIPs in providing for regular income or pension during retired life. However, in its attempt to hard-sell ULIPs, IRDA has brought out an ambiguous and misleading ad.
A ULIP is a life insurance policy, which provides a combination of risk cover and investment. It is the most common ‘insurance’ plan sold by life insurers and is quite popular among investors, thanks to massive promotions and incentives. The ad basically tries to impress upon the reader that a ULIP is a sound investment option if one is looking out for regular income during retired life. However, there are several issues with the claims made in the ad.
First, it has failed to substantiate this argument with any comparative indicators as to the returns that the product is likely to generate over a period of time. The ad provides no factual basis for making claims that ULIPs are the right product to ensure that you are well-provided for in your retirement. There is no comparative data of the returns of other long-term investment products, to underline ULIPs’ superiority.
The fact is that IRDA or anybody cannot provide this comparative information. This is simply because ULIPs have no track record. Who can say how ULIPs would do over, say, 30 years? Even products with established records do not perform as per their promise. What if ULIPs turn out to be the worst option between bank recurring deposit schemes, balanced funds, New Pension Scheme and even diversified equity funds? There is no guarantee that a ULIP will provide the holder with a safe kitty once he reaches retirement. If so, is the regulator pushing the investors into a wrong product?
Second, what is the rationale behind the insurance regulator recommending an investment product? The main purpose of insurance is to provide protection to the policy-holder and is not meant for generating investment returns.
Third, the ad also appears vague in advising the reader on the tenure of investment. It says, “If the term is too short, the policy accumulation would be insufficient for a pension corpus. If you stretch the term too long, you may end up being required to pay premium when you would actually like to receive pension payouts.” The obvious question that arises here is what term or period is ideal for a ULIP? The ad leaves this bit of information hanging in thin air.
Fourth, as we mentioned in the beginning, it is bizarre that IRDA as a regulatory authority should be expounding the benefits of a single product type. The fact that it is touting the benefits of ULIPs while ignoring other products is surprising. If instead it were to launch a public awareness campaign highlighting the benefits of insurance, it would make more sense.
Interestingly, IRDA’s advertising blitz comes at a time when it is waging a war with SEBI over the regulatory purview of ULIPs. Moneylife tried contacting some industry experts on their views on this matter, but no one appeared to be willing to speak on this strange ad.— Sanket Dhanorkar