Unexpectedly, the Indian insurance industry has become the subject of conversation on Dalal Street as it has become a major contributor in terms of investing in the stock market. Although the premium collection slowed down somewhat in early 2009, but it is gaining momentum with the overall healthy market sentiment. Premiums collected under ULIPs are a major factor in boosting equity investment. The industry upgrade premium in the ULIP category has risen from Rs. 26,638 crores to Rs. 37,543 crore, an increase of 41 percent over the year. In addition, insurance companies have increased their risk in stocks – they have invested rupees. 44,358 crore capital in April-December of the current fiscal year.
The practice of improper sales in ULIPs declined significantly after insurance oversight, the Office of Insurance Regulation and Development (IRDA) introduced some “investor-friendly regulations,” imposing a fee limit of up to 3 percent and 2.25 percent for ULIP. with a maturity of up to 10 years and more than 10 years respectively. Moreover, IRDA’s decision on solvency ratio, corporate governance, disclosure, intermediary payments, and resolution of unit-related health insurance plans has brought great benefits to the insurance industry.
How does ULIP perform well in the long run?
ULIP’s main goal is to steadily build up wealth in the long run along with additional insurance coverage. Investors should have a clear view that investing in ULIPs is not for obtaining high insurance coverage.
A fund manager in insurance companies has an advantage over other market-related products in terms of holding stocks over a long period. Thus, the beating of portfolio stocks, measured by the portfolio turnover ratio (PTR), is relatively smaller or insignificant. Because the jump involves costs, it has a serious impact on the performance of the fund. The higher the portfolio turnover ratio, the higher the value.
Moreover, the IRDA restriction on general fees, including the fund management fee limit (FMC) in the case of ULIPs, has brought a different transparency that benefits policyholders in terms of increased profits at their ends.
A close look at the performance of other market-related products compared to ULIPs gives a stunning fact; other market-related products lag behind ULIPs ’profits with higher margins in the long run, confirming that investing in ULIPs is an ideal investment tool for wealth creation in the long run. On average, historical fund management fees (FMCs) in other market-related products (mutual funds account for about 2.1 percent), while in ULIPs the maximum FMC is limited to 1.35 percent.
For example, recurring investments of rupees. 1 lakh in a diversified equity-linked fund (ELSS) for 15 years grows to rupees. 28.54 lakhs at an estimated growth rate of 10 percent, giving a net profit of 7.69 percent (given the average FMC of 2.1 percent), while the same amount invested in ULIP over the same period could range from 28 , 63 lakhs to rupees. 31.59 lakhs at an estimated growth rate of 10 percent, giving a net profit of 7.97 to 9.03 percent. The final value goes down even more when you consider other tax-saving tools, such as PPF, which give 8 percent per annum. Investments of 1 lakh rupees per year in PPF for 15 years grow to 27.15 lakh rupees.
Thus, it is clear that ULIPs value more than other products in terms of profits and additional benefits such as insurance coverage; however, it is gaining below PPF because investing in ULIP involves high risks. Yields on ULIPs increase even more due to lower FMC when the investment choice is a loan fund and the estimated rate of return is 10 percent (in FMC debt funds it is usually around 0.75-1 percent). The table shows the different incomes as above. However, high entry costs along with operating costs are detrimental to ULIP performance, having a shorter maturity or when opting for it.