Business: Zerodha co-founder Nithin Kamath in a post on LinkedIn flagged a surge in sales of unit-linked insurance plans (Zerodha co-founder Nithin Kamath points to surge in ULIP sales). “While ULIPs promise to be the best of both worlds – investment and insurance – the reality is that they offer the worst of both,” Kamath wrote. He added that the surge in ULIP sales is primarily due to the high commissions involved by banks. “Banks are vigorously promoting these products because of the lucrative commissions, but the insurance cover provided is usually inadequate,” he said. Kamath advises consumers to separate their investment and insurance needs. “You are better off investing directly in mutual funds and buying a term insurance policy. It is much cheaper and gives you adequate coverage,” he says. “Many people are not even aware that they have a ULIP or any other awesome insurance product.” The Insurance Regulatory and Development Authority of India (IRDAI) had issued a master circular in June prohibiting the promotion of ULIPs as investment products. The move addresses growing concerns about mis-selling of these products.
ULIPs are financial hybrids that combine insurance and investment.
A portion of the premium paid by policyholders funds life insurance, while the rest is invested in equities, bonds or a mix of both. These plans involve a mandatory five-year lock-in period, during which withdrawals are not permitted. The IRDAI directive responds to reports that insurers are mis-selling ULIPs, often marketing them as pure investment products. This practice has already been flagged by the Securities and Exchange Board of India (SEBI). Some insurers promote new ULIPs similar to new fund offers (NFOs), which may mislead consumers about the true nature of the product. To prevent this, IRDAI has mandated that all ULIP and annuity product advertisements comply with the guidelines of the Advertising Standards Council of India. These advertisements must clearly disclose the risks associated with the linked insurance products and avoid suggesting that past performance or bonuses guarantee future returns.
