It is time Ulips are stopped from masquerading as mutual funds

Such misselling must end to protect consumers and life insurance should be promoted for what it is

is the author of ‘Bad Money’.

Unit-linked insurance plans (Ulips) are a very important product for life insurance companies. As of March 2023, for every ₹100 of assets under management of these companies, a little over ₹11 came from Ulips. As of March 2022, this figure was close to ₹12. Ulips are basically investment plans that come with a dash of life insurance.

Now, the problem with broader averages is that they might reveal what is important but they conceal what is vital. So, if we leave out the primarily government-owned Life Insurance Corporation of India—the country’s largest life insurance company—and look at the figures of only private life-insurers, as of March 2023, for every ₹100 of assets under management of these firms, a little over ₹41 came from Ulips. This figure was close to ₹45 as of March 2022.

So, Ulips, while being an important part of the overall life-insurance business, are the heart and soul of the business of private life insurance firms. Given this, these firms go out of their way to push this financial product. In fact, over the years, quite a few private life insurers—especially when the stock market is doing well—have tried to pass off Ulips as mutual funds (MFs), a trend that has made a comeback of late.

The private life insurers do this by using terms like ‘new fund offer’ (NFO), ‘small-cap fund,’ ‘mid-cap fund,’ ‘diversified equity fund,’ etc. These terms are used by equity MFs, which largely invest in stocks. An NFO is a term that usually refers to the launch of a new scheme by a mutual fund.

In the recent past, insurance companies have launched Ulips named as ‘small cap fund’, promising to invest in small-cap stocks—stocks ranked 251st and beyond in terms of market capitalization. Now, there are a few things that stand out in ads of such and other similar Ulips planning to invest in stocks.

First, nowhere do they mention that the product being sold is a unit-linked plan, unless one chooses to dig deep into the fine-print. Why is this important? As mentioned earlier, a Ulip is an investment plan with a dash of insurance. Given this, a major part of the premium is invested depending on the mandate. If the mandate is to invest in small-cap stocks, that is where the investment is made. If the mandate is to invest in debt securities, that is where the investment is made. In that sense, a major part of a Ulip is almost akin to an MF. But it’s not an MF simply because a part of the premium paid necessarily has to be allocated for insurance (sum assured) of a certain amount. Hence, it’s important for this to be highlighted upfront in all communication and not be relegated to the fine print, given that most retail investors are not really financially savvy.

Second, such advertisements tend to highlight the recent fantastic performance of the stock market. A newlylaunched Ulip held up the superlative performance of small-cap stocks over the last few years. Nonetheless, smallcap stocks on the whole were a loss making proposition from 2008 to 2017. And that’s the risk of investing in stocks. Of course, if these things are clearly highlighted in advertisements, selling a Ulip becomes more difficult. Given this, over-simplified communication that alludes to a Ulip acting like an MF makes it easier to sell the product.

So, what’s the way out? In an ideal world, MFs should be selling schemes that invest in stocks and other investment assets, and life insurance companies should be selling term insurance. A term insurance policy is a policy that leads to a payout to the nominee(s) in case the policyholder dies during the term of the policy; and if the policyholder outlives the term of the policy, then no payments are made.

But then, that’s really not going to happen, given that the current system of life insurance companies selling investment-oriented insurance plans— not just Ulips but traditional plans like endowment and money-back as well— is too well entrenched. From the central government to life insurers and from banks that own such firms to individual agents trying to make a living by selling investment-oriented insurance, most of those involved have an incentive to keep the system going. Also, any such change will be highly disruptive before any benefits start to accrue, and hence cannot be initiated. Nonetheless, there are a few things that can be done.

First, all advertisements selling Ulips should clearly say so. So, an insurance company should mandatorily say that it is selling a small-cap Ulip and not a small-cap fund. Second, like MFs, every Ulip advertisement should state clearly that “Ulip investments are subject to market risk,” and not hide this in the small print. Of course, when the going is good, most people will not pay attention to such disclaimers. Nonetheless, life insurance firms, or any other investment firm for that matter, should not be seen encouraging risky behaviour when it comes to investing.

Third, term insurance needs to be promoted at an aggregate industry level and people should be made to realize its importance. It is time that insurers seek inspiration from the MF industry and run a “term insurance sahi hai (is right)” kind of campaign. At the end of the day, life insurance companies should make an effort to sell genuine life insurance and not just insurance packages that masquerade as mutual funds.