Apr 17, 2010

How to stop Life Insurance Abuse: Some Random Thoughts

Now that the Ulips have become talk of the day, The Money Quest has some unconventional and out-of-the-box measures for reforming the life insurance sector (Request: Please don’t call me a maniac!)

But first let us understand: What are Ulips? Why is Sebi trying to interfere?

Ulips are basically mutual funds with a tiny amount of life insurance thrown in to escape the securities regulations. Put another way, Ulips are investment schemes camouflaged as insurance so that
it becomes possible to pay the high commissions to distributors and agents.

Due to the too high difference between mutual funds commission and Ulip commissions, there is widespread misselling of Ulips by agents / distributors / wealth managers. The mutual funds commission of 0-1% seems negligible as compared to upfront commissions of 10-20% for Ulips.

Sebi is forced to interfere to protect the interests of policyholders / investors as the insurance regulator IRDA is failing miserably in its duty to root out corrupt practices from life insurance industry. Rather than protecting policy holders from the life insurance companies, it is doing exactly the reverse...acting more like an industry association instead of a regulator.

Here’s the list of some radical measures to put a stop to the abuse of the word ‘life Insurance’:

1. Making the following statutory warning mandatory for insurance cum investment products : “Investing in Insurance is harmful to your financial health”.

2. Removing the distinction between life insurance & general insurance...perhaps the best way out.

3. Scrapping all tax benefits on insurance cum investment plans...see how cleverly the DTC is drafted to protect the interest of insurance industry.

4. Substantially reducing the rates of commission paid to insurance agents. Further, banning the practice of front loading of commissions.

5. Dismantling IRDA…hardly serves the purpose...there seems to be no difference between Life Insurance Council and IRDA.

6. Making the pure life insurance mandatory...if third party insurance for vehicles is compulsory, why life insurance can’t be made mandatory…isn’t it a social and moral duty of every individual to safeguard the livelihood of his dependents if something unfortunate happens to him?

7. Changes the way life insurance companies publish the data...make it mandatory for life insurance companies to disclose the average ‘sum assured’ figure for each type of Ulips, endowment / money back and whole life plans?

8. Change the way we currently calculate life insurance penetration...should be based on ‘sum assured’ and ‘the number of lives covered’ and not the ‘premium income’.

9. Launching public awareness campaigns about the real purpose of life insurance...when the topics of homosexuality and live-in relationships can be discussed publicly, why the hesitation in talking about ‘death’ the only certainty in life?

Any takers? But then, what will happen to LIC????

What use is talking about CSR (Corporate Social Responsibility) when the very foundation of many industries is built on unethical grounds? Is it not possible to make profit by producing / distributing the products / services actually needed by the mankind? Why can’t Tata, Birla, Bajaj, Ambani and Mittal start a life insurance company selling only pure life insurance plans?...the task is indeed very difficult but not impossible.

Am I paranoid? May be …when the talk is going on about allowing life insurance companies to float IPOs and also increasing the FDI limit, I’m talking about virtually shutting down the business of life insurance industry.

But I’ve hope…one day the insurance scenario will surely change for the better…when only term insurance plans would be sold and people will start buying pure insurance coverage on their own...it might take decades but the day will surely come…let’s wait and see: Who bells the cat?

Also see:
1. 5 Ulip Secrets
5 Top Myths about Life Insurance


  1. I liked the way u put forth ur views on this one... i also share the same opionion on the same.. Keep up the out of the box thinking!

  2. Dear Mr.Fisher,

    Thanks for the nice article. Though your views & recommendations are little bit aggressive, the crux idea is thought-worthy.

    However, we can’t support SEBI in toto, for the answers from any unbiased analyst to the following questions.

    1)ULIPs have been introduced & marketed since 2001. However, SEBI has discovered very recently, they are similar in structure to mutual fund products. What was SEBI doing all these days? What made to open SEBI’s eyes?

    2)Why SEBI banned just 14 insurers, while others are left scot-free? In what way LIC is holier than those poor 14 life insurance companies? Is it for the reason that LIC is a Government company and SEBI doesn’t want to pull it down?

    3)The other insurance companies, who are not banned by SEBI, have all reasons to interpret the ban to sell their ULIPs. For the simple reason, their ULIPs are not being banned by SEBI. If SEBI is really interested in having control over ULIPs, why it has left other ULIP marketers?

    4)Does SEBI want ULIPs must be banned to protect the interest of policy holders\investors or Insurance companies must need its licence to market ULIPs?

    5)Some mutual funds (ex. LIC MF ULIS) tied-up with insurers to offer accident cover & critical illness cover. Aren’t they akin to insurance policies? When will SEBI discover this….?

    6)Do this tussle help our nation’s forward growth in any way…?

    I’d prefer to disagree your contention “Ulips are basically mutual funds”. They are similar; however not identical. Mr.R.Ramakrishnan has substantiated this view through his article captioned, “A needless row over control of ULIPs”, published in the business column of The Hindu dated 19th April 2010. (I’d request you to have a glance on the article)

    Also you’d agree majority of Indians are not aware/refuse to accept, that pure term policy is the best back-up for their life. About 50 years back, LIC first launched pure term policies and found them utter failure. So endowement & ulip policies popped up. Commissions/margins are an integral part of any sales. They are offered worldwide to boost sales and no one under the sun can abolish it. Instead of crying loudly about commissions, why don’t we make the public aware of the benefits of term policies…?

    I’d request you to post these comments on your blog, as the readers should be guided to view the other side too.

    (Note : Your slightly excessive aggressiveness & choice of words add contrast colours to your admirable wisdom. Would it not be wonderful to be kind enough while criticizing…?)



  3. Satish,
    What you are saying is that if SEBI has woken up at least now, they should not do so bcoz they have been sleeping over this issue last 10 years? Its never too late if you can correct something now.

    I bet 90% ULIPs are sold without telling the customer that ulip has 20-40% commission for the agent in 1st year & after 3 years agent loose interest & want to sell you another new ulip instead of continuing the older policy.

    Commission & margins are part of every sales .........agreed but then it should be told to the client upfront which 99% agents wont do & thus cheat customers by wrongful concealment of rightful information.

    Last 5 years I have bought 11 ulips & none of 3 agents told me the commission they get. When I had asked why in 1st year there so may charge from investment they always gave vague answers, this year I have not invested in any ulip bcoz of becoming aware due to SEBI guidelines & clearly told my agents, insurance will be term insurance & investment will be now via mutual funds only.

    The ulip selling was a murky business with wrongful intent of expensive insurance & less money investment in reality.



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