Why you should not believe LIC on Ulips
Ulips help the insurance company, its agents and the government. But they are a bad deal for investors buying 'insurance'. So stay clear of Ulips.
Let's take the case of the decision made by the Life Insurance Corporation of India to relaunch Unit-Linked Insurance Plans (Ulips) after a gap of nearly two years. Ulips are essentially high-cost mutual funds masquerading as insurance. A major part of the premium collected through selling Ulips is invested in the stock market.
As the Business Standard reports, "The intention is to take advantage of the bullishness in the stock market. Sources familiar with the developments said this would also help the insurer attain its target of Rs 45,000 crore of new premium income collection in 2012-13 and increase its market share."
Now this where one steps into hard-to-believe territory. Giving out every reason for a decision except the real one. And what is the real reason for LIC suddenly deciding to launch Ulips?
The real reason for LIC suddenly deciding to launch Ulips is the disinvestment programme of the government. At the beginning of the year the government had targeted to raise Rs 30,000 crore by selling shares of public sector enterprises to investors.
But now that number will have to go up due to several reasons. The government has been spending money at a faster rate than it had envisaged. The fiscal deficit during the first six months of the year had already reached 65 percent of the targeted amount of Rs 5,13,590 crore.
Tax collections have slowed down and only 40 percent of the projected amount has been collected during the first six months of the year.
Also, the auction of telecom spectrum through which the government had plans of raising Rs 40,000 crore has turned out to be a damp squib. The government could collect only Rs 1,707 crore, or around 4.3 percent of the targeted amount.
This means a shortfall of nearly Rs 38,300 crore which will now have to be most probably made up through the disinvestment route. Hence, a total of around at least Rs 68,000 crore (Rs 38,300 crore + the earlier target of Rs 30,000 crore) will now have to be raised through disinvestment.
This means the government will have to sell shares of a lot of public sector companies to investors. But the question is whether investors have an appetite for it?
And the answer is no, given the current mess that the government is in. This is where LIC comes in. India's biggest insurer bought a major part of the recent sale of shares of Hindustan Copper Ltd by the government and thus rescued its disinvestment. The public did not even have great appetite for Rs 800 crore worth of disinvestment, so how can it has the stomach for Rs 30,000-60,000 crore - if that's what the finance ministry wants to raise.
And this is something that LIC is expected to do over and over again till 31 March 2012 and help the government meet its disinvestment target - and hopefully exceed it. Recently the government allowed LIC to own up to 30 percent of a company against the earlier stipulated limit of 10 percent.
Hence, LIC will end up buying shares which the government wants it to buy rather than the shares it should be buying from the point of view of generating good returns for its investors. Given this, LIC needs money which has the mandate to be invested in equity. The premium that it collects through its traditional endowment plans needs to be invested in safer avenues like government securities and loans raised by the best companies.
This money cannot be invested in the stock market. The money raised through selling Ulips can be invested in stocks. And that is the kind of money that LIC needs right now. Hence the decision to launch Ulips after a two-year hiatus.
Also the last three months of the financial year are the best time to sell Ulips or any other kind of insurance plan, given that this is the time most people get around to doing their tax planning and investing money in tax saving avenues, of which insurance is one.
Ulips were the wonder drug for the insurance industry for a very long period of time until investors started figuring out that the only person gaining from Ulips was the insurance agent. Also, the clampdown by the Insurance Regulatory and Development Authority (IRDA) of India, the insurance regulator, on Ulip commissions pushed insurance agents towards traditional insurance plans which continue to pay a high commission.
Now Ulips are all set to act as the wonder drug for the government. The money raised by LIC by selling its new Ulips is likely to be invested in the shares of the public sector units the government plans to sell to meet its disinvestment target.
It's a win-win proposition for everyone. The government gets its easy money. LIC gets new premium on which it charges a management fee to manage that money. The insurance agent makes the commission. The only person losing out, as always, is the person buying the Ulip, who ends up indirectly owning shares that no one else in the market wants to buy. But then who was bothered about him anyway?
Today's Economic Times says that the LIC lost over Rs 5,000 crore by buying public sector shares of ONGC, NMDC and NTPC.
But DK Mehrotra, LIC Chairman, sang the praises of Ulips toBusiness Standard on an earlier occasion. "Ulip has its own advantages, it gives you fast returns." But the question Mehrotra does not answer is faster returns for whom? It clearly isn't the Ulip investor, as The Economic Times story indicates.
Vivek Kaul is a writer. He can be reached at firstname.lastname@example.org
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