Insurance Regulator Prohibits Advertising ULIPs As Investment Products

In a bid to curb mis-selling, the Insurance Regulatory and Development Authority of India, in a master circular released on June 19, has barred insurance companies from advertising unit-linked insurance plans as investment products.

ULIPs are products that offer both insurance coverage and investment exposure in equities and bonds. The policyholder pays a regular premium that will cover the insurance and the rest of the portion of this premium is pushed toward investments made into equities, bonds or both.

This product comes with a mandatory lock-in period of five years, and partial or complete withdrawal is only permitted after the completion of the lock-in period.

The regulator is seemingly reacting to instances of mis-selling of ULIPs.

In fact, the Securities and Exchange Board of India has had conversations with the insurance regulator about these issues earlier in the year, according to a highly placed official, who spoke with NDTV Profit on the condition of anonymity. Insurance companies were advertising the investment components of ULIPs as a new fund offer or NFO.

The circular also called for all advertisements to disclose risk factors that are associated with linked insurance products.

All advertisements are required to disclose that the bonuses or past performance of the product cannot be treated as a guarantee of future performance of the investment.

The mandate also calls for the disclosure that the product is subject to the risk of the overall performance of the investment, in terms of management of expenses, mortality and lapses.

Further information like the bonuses projected under the product not being guaranteed by the provider need to be included in advertisements.

Advertisements need to also disclose that the past performance does not stand as an indication of future bonuses.

"The advertisement for all linked and annuity products having variable payouts should also comply with the standards set out by Advertising Standards Council of India," the regulator said.

Advertising slips into mis-selling when ULIP scheme names and advertisements resemble mutual fund schemes, confusing the consumer.

This issue arises because mutual fund houses are required to ensure that the risk is disclosed while ULIP schemes, which are also market-linked products, do not disclose these risks while advertising, said Harshvardhan Roongta, chief financial planner at Roongta Securities.

“This brings a false sense of security that is promised in ULIP schemes, despite the risk of being affected by market fluctuation. Mutual funds and ULIPs are similar to an extent but different in structure,” he said.

The major differences between mutual funds and ULIPs are the lock-in period and the charges that are applicable in the latter.

There is a five-year lock-in period for ULIPs where partial or complete withdrawal is not possible. This does not apply to mutual funds, except for solution-oriented schemes and tax-saving schemes, called equity-linked savings schemes.

Secondly, in ULIPs, there is only a portion of the premium that is invested and there are charges like premium allocation charges, fund management charges, partial withdrawal charges, mortality charges, and guarantee charges, among others, that apply to ULIPs.

The intent of the regulator is to ensure that adequate disclosure of these elements are present in ULIP advertisements, so that consumers can make informed choices, Roongta said.

Monika Halan, author of Let's Talk Money, termed this move "a band-aid and not surgery".

Halan posted on the social media platform X (formerly Twitter), "IRDAI's latest step will check the fake 'we are a mutual fund' ads that insurance companies were putting out, but will not solve the fundamental problem of an insurance firm running a mutual fund—as they do with ULIPs."

"A ULIP is an investment product that carries a crust of insurance. The fundamental flaw in this product is that the money is managed by an insurance company and not competitively handed over to an AMC—like it used to be in India and like is done in many parts of the world," she said.