The Bombay Stock Exchange (BSE) building, background right, looms over a no-entry street sign in Mumbai, India. Photographer: Vivek Prakash/Bloomberg

Ulips Stagnate As Investors Switch To Mutual Funds

Net inflows into unit-linked insurance plans have shown sluggish growth over the past few years as investors switch to mutual funds.

Additional yearly inflows into Ulips—for fresh plans bought every year— stood at Rs 790 crore between April and February for financial year 2018-19, according to data shared by Insurance Regulatory and Development Authority of India under the Right to Information Act. That compares with Rs 4,942 crore net inflow in 2017-18.

Flow of funds into Ulips have stagnated over the last five years due to lower returns and falling investment income due to volatility in equity markets. “Growth in unit-linked policies is based on getting new investments and the performance of its underlying assets. In this case, both factors have underperformed,” Dhruv Mehta, chairman of Federation of Independent Financial Advisors, told BloombergQuint.

Retail investments have migrated to mutual funds. Asset managers are getting on average Rs 6,000-8,000 crore of retail money every month through systematic investment plans, according to Association of Mutual Funds in India. Total equity assets contributed by retail investors stood at Rs 5.03 lakh crore as of December 2018, with nearly 41 percent holding investments for more than 24 months.

By contrast, unit-linked assets declined marginally by 0.5 percent to Rs 3.79 lakh crore as of March 2018, compared with a 11.6 percent year-on-year growth in the previous fiscal, according to IRDAI data. This is primarily because most investors surrender their ULIP policies at the end of five-year lock-in period. Industry data for FY19 was not available.

Ulips are investment products which provide a mix of insurance with investment and have a lock-in period of five years. A part of the premium is dedicated towards life cover and the rest is assigned to a common pool of money, called fund, which invests in equity, debt or a combination of both. The returns are dependent on the fund’s performance.

The premium income from Ulips grew 4 percent to Rs 22,565 crore between April 2018 and February 2019, compared with a 23 percent year-on-year growth in FY18, according to IRDAI data. To be sure, investors require to continue paying premiums for at least five years to recover what they have invested along with returns. Hence, the bulk of the new business premium is primarily to ensure the policy is active for five years.

Slower growth, according to Anirudh Jain, who heads insurance at the financial services firm Centrum Group, was due to lower investment income of life insurers. “It's not that many people have pulled out of Ulips, but the growth seems flat as investment returns were poor due to turbulent stock markets, especially in the last six months.”

Harsh Roongta, an investment adviser, disagrees. “No long-term investment decision is made by considering short-term market movements.”

Roongta, however, does expect a steeper correction in assets under management of life insurers in the ongoing fiscal. “If the new premium growth is low, it's mainly because existing assets are being withdrawn after completion of five years, as Ulips were mis-sold by insurers as a five-year product,” he said. “A large number of policies may have lapsed during the five-year lock-in term, and because their underlying money is moved to a liquid fund, it could cause further lowering of assets linked to Ulips.”

The fall in premium income impacts private life insurers the most, which dominate the product category, as the country’s largest insurer, Life Insurance Corporation of India, is nearly absent in this space, data show.

Insurance companies levy 3-5 percent as charges in the first five years of lock-in, eating into the investors’ corpus and impacting the return at the end of five years, according to information on IRDAI’s website. Despite the lock-in, Ulips may still see some interest after the general election, according to Jain.

“Investments in Ulips are likely to improve as markets stabilise after elections, mainly due to their tax-free nature,” he said. “Unlike mutual funds, gains from unit-linked policies are not taxed in India.”