Why do insurers prefer ULIPs?

Insurers love ULIPs for several reasons. Most important of all, insurers can sell these policies with less capital of their own than what would be required if they sold traditional policies.   In traditional ‘with profits’ policies, the insurance company bears the investment risk to the extent of the assured amount. In ULIPs, the policyholder bears most of the investment risk. Since ULIPs are devised to mobilise savings, they give insurance companies an opportunity to get a large chunk of the asset management business, which has been traditionally dominated by mutual funds.
Advantage
  • The accretion to the fund invested can be checked on daily basis unlike the traditional   policies.
  • There is lot more flexibilities like partial withdrawal, switching, redirection, early withdrawal, Sum Assured reduction, top up contribution, etc.
  • Charges are transparent in nature, with the latest AML guidelines insisting on common nomenclature of charges for all insurance companies.
  • The customer can time the market by exercising switch options and make the most when markets are zooming or choose to be conservative when markets are falling. its thus win-win situation
  • He gets a life cover at a nominal cost unlike mutual funds,
  • Almost all companies provide riders like accidental death and disability/dismemberment riders, crtitical illness rider, hospital cash benefit rider, income loss rider, etc
  • Stages in one life like education of children, marriage, and retirement needs can be soundly planned by the help of ULIPs.
  • Tax advantages are also offered by the ULIPs.
Disadvantages
  • Investors find it difficult to understand the nuances of capital market and therefore goes by the heard mentality. ie, they invest because their friends and family is investing without understanding how ULIPS are designed.
  • ULIPS are attractive for risk taking people and less attractive for risk averse people.
  • Some consider taking term insurance and a mutual fund as a combination to beat the ULIP.
  • Some consider charges levied exorbitant and not commensurate to the returns offered
  • The complicated design of the polices make them les aware of the product features and chances of misselling by agents are very high.