The changing face of ULIPs in 2006

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The introduction of unit-linked  plans (ULIPs) has possibly been the single-largest innovation in the field of life insurance in the past several decades. In a swoop, it has addressed and overcome several concerns that customers had about life insurance - liquidity, flexibility and transparency and the lack thereof.

These benefits are possible because ULIPs are differently structured products and leave many choices to the policyholder. Put simply, ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one's specific needs, offering unprecedented flexibility and transparency.

With these flexibilities, however, many have begun to view ULIPs as short-term instruments to park one's money, akin to mutual funds. It cannot be emphasized enough that ULIPs, like all other life insurance policies, are long-term products that are designed for the dual purposes of protection and long-term savings. In fact, those who purchase a ULIP with a short-term perspective are doing themselves a greater disservice, as the initial charges that they pay are relatively high.

Taking all these issues into view, and considering the popularity that ULIPs have gained over the past few years, the IRDA has recently introduced a comprehensive set of guidelines that will protect the long-term interests of both customers and life insurers by ensuring the longevity of products are sold. Salient features of the guidelines are the minimum sum assured on the product, a minimum term of the policy and a lock-in period for premiums.

With ULIPs soon subscribing to these guidelines, they are likely to attract customers who wish to adopt a more goal-oriented approach towards buying life insurance, such that it helps them meet their considered financial goals like child's education or retirement planning in a systematic manner. No longer will customers buy the hottest ULIP in the market with the perspective of making quick gains and exiting, or trying to time the market. Moreover, with the minimum sum assured requirement, customers are now more likely to evaluate the protection element of their products according to their actual requirements.

Such customer behaviour will translate into benefits for life insurers as well. With the assured commitment of funds, they are in better poised to take long-term calls on the invested funds and deliver the higher returns associated with such perspectives to the investors.

Given the complexity of the nature of ULIP products, the IRDA has shown pragmatism in giving sufficient time for implementation of the guidelines - June 30, 2006 - thereby ensuring that companies can comprehensively adopt the new regulations across functions. While these guidelines might result in a momentary dip in the popularity of ULIPs as customers come to terms with the new structure, to consider that these guidelines will curtail their acceptance is a bit of an exaggeration. ULIPs offer some excellent benefits of transparency and flexibility, which are certain to be retained in the new products. As a product structure, they are sure to go from strength to strength and gain in numbers and popularity as their benefits become clearer to customers.

Sandeep Batra,
Chief Financial Officer - ICICI Prudential Life Insurance