Insurance companies can’t advertise ULIPs as investments & mislead customers: IRDAI

The insurance regulator has prohibited insurance companies from advertising Unit Linked Insurance Plans (ULIPs) as investment products.

“An advertisement on the unit linked insurance product, index linked product and annuity products with variable annuity pay-out option shall contain adequate, accurate, explicit and updated information, in simple language,” the Insurance Regulatory and Development Authority of India (IRDAI) said in a master circular.

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What are ULIPs?

ULIPs are hybrid financial products combining insurance with investment.

A portion of the insurance premium is allocated towards life insurance coverage, while the remainder is invested in a mix of equities, bonds, or a combination of both, according to a CNBC TV18 article.

Why the new rules?

This is because throughout last year, insurers launched new small and mid-cap fund options under their existing ULIPs. But the term ‘insurance’ was absent in several advertisements, making people misunderstand these products as mutual fund schemes, Moneycontrol wrote.

What are the new rules?

The IRDAI has said that advertisements referring to past fund performance must display compounded annual returns for the previous five calendar years, accompanied by a disclaimer that past performance does not guarantee future results. If relevant, benchmark index performance must also be disclosed alongside fund performance data, the Times of India wrote.

Insurers are also now required to establish an advertisement committee and appoint compliance officers for maintaining strict controls over advertisement content.

Also, the regulator has instructed companies to provide policyholders the option to make online premium payments or appoint a new agent or direct sales staff if the agent who sold the policy leaves the company.

The regulator allowed the renewal commission to be paid to the new agent. Furthermore, insurers are now permitted to accept any new policy from the assigned insurance agent or direct sales staff for the same policyholder if the assigned policy is not revived or is surrendered within six months.

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Should you consider ULIPs?

The benefits and shortfalls of ULIPs are outlined as follows, according to the CNBC TV18 article.

Benefits:

• Dual benefit: ULIPs provide life insurance coverage along with the opportunity to invest in various asset classes, making it attractive to those looking for an integrated financial solution.
• Flexibility: ULIPs offer the flexibility to switch between different fund options, allowing policyholders to adjust their investment strategies based on market conditions.

Shortfalls:

• Charges: ULIPs come with various charges, including premium allocation charges, policy administration charges, and fund management charges, which can impact overall returns.
• Market risk: The investment component of ULIPs is subject to market risks, and returns are not guaranteed.
• Lock-in period: ULIPs have a mandatory lock-in period of five years, during which withdrawals, both partial or complete, are not permitted. This restricts liquidity, making ULIPs less suitable for those who may need quick access to their funds.

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