Wednesday, June 30, 2010

Why IRDA v/s SEBI hasnt gone in your favour???

Those of us who are in India, we have been inundated with news of tussle between SEBI and IRDA to control/regulate the ULIPS launched by insurance firms. The SEBI's contention was that since ULIPS are primarily a MF in the garb of insurance plan with huge upfront charges, SEBI should have right over regulating that product, while IRDA position was that since ULIP is an insurance product it will be regulated by IRDA. This dispute was also referred to court,but, finally the finance minister intervened in favour of IRDA. So, it is settled now, IRDA is the regulator who will regulate ULIPS.
So what does this mean for an average investor like you and me?? Is it good or bad?? The answer is both, good and bad.
Let us see why
IT IS GOOD BECAUSE
1. ULIPS to become relatively a cost effective saving tool- My displeasure over ULIPS as an investment product is well known to the readers of this blog. I feel they are one of the worst products that one can invest in.The reason is its atrociously high charges which can be upto 50-80% of your premiums for first few years. But, now the situation is likely to get better after Sept 2010. The IRDA has mandated that charges be brought down and also should be evenly spread over the tenure rather than being just front loaded as it is now. SO the ULIPS as a product will RELATIVELY become better than its earlier AVATAAR.S o in case you like ULIPS and want to invest only in them, then this is good news for you.
2. The lockin to go upto at least 5 years-IRDA has also mandated that minimum lockin should be 5 years atleast than 3 years currently in vogue. This will ensure that people are stay put in the plan for a longer duration and are able to reap the benefits of long term investing. It will also reduce chances of agents misselling this product as "3 year" saving tool.
3. Charges to be uniformly distributed - Charges will now be equitably distributed over the term of the plan rather than being front loaded. This will ensure that even if one is surrendering the policy early he isnt heavily penalised because of charges.
4.No charges on policy surrender- Currently on surrendering the insurance policy in 3- 4 years time, one does not get anything or if you get then that is close to nothing . This is due to prohibitive charges and upfront commission that companies pay out of your premium. But this will change as now no longer companies can charge any fee on surrendering the plan. This is likely to be effective Sept 2010.
IT IS BAD BECAUSE
1. It is still a ULIP which will still have charges which may be lower than ULIPS current charges but will still be manifold higher than MF charges. They will still be one of the worst products to invest in.
2. With SEBI as regulator, things like high commission etc would have gone and that would have brought charge structure to MF levels and then ULIP would have been a really good product offering you the twin benefits of insurance and MF at a very effective rate.
In the end, I think the FInance Minister's decision is not really in the right interest of an average investor who wants to invest in a saving tool which gives maximum appreciation head room with minimum possible charges/fees.