By now most of you would be aware of the SEBI – IRDA spat about ULIPs that has been going on since the past 4 days. The back-story is that SEBI banned issue of all new ULIPs from 14 insurance companies stating that they have not registered their product with SEBI, so they can’t issue new ULIPs.
The next day – IRDA sent out a notice stating that insurance companies can continue business as usual, as they don’t fall under SEBI jurisdiction.
The finance minister intervened yesterday, and the ban on ULIPs was lifted. All this is interesting on its own, but a particular statistic on Business Standard really caught my eye today.
The piece is about why SEBI feels the need to regulate ULIPs, and lists out a development that happened a few months ago.
A few months ago – SEBI had banned entry loads on mutual funds, and due to that the sales of mutual funds are getting hurt severely. Agents have lost interest in pushing mutual funds, and they were pushing insurance products instead. But, here is the part from the article that got my attention:
According to distributors, Ulips earn 15-20 per cent upfront commission on each scheme sold, while MF schemes yield a measly 0.5-1 per cent. So, distributors have started luring MF investors towards Ulips, resulting in good growth for insurance companies.
15 – 20% is a bit steep – don’t you think?
Investors need to realize that this money is going to come from what could have been their profit, or even capital (if the fund makes a loss).
Normally, a higher price means a higher quality, but this is not always the case with mutual funds, ETFs, or ULIPs. If you are being charged a steep price – there should be clear evidence that you are getting a better product. If not, then you are better off with low cost index funds and term insurance.