IRDA Recommends 25% Investment of ULIP Funds in Government Securities

With the Insurance Regulatory and Development Authority (IRDA) proposal to invest 25% of unit-linked investment fund (ULIP) into central government securities, the government will receive a larger pie of the income generated by the life insurance sector. This proposal is in lieu of the fact; the government requires capital for infrastructure programs.

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However, this move by IRDA will dampen the spirits of both private sector insurance firms and investors who had betted heavily on ULIP for their future planning. With the proposal to invest in G-sec bonds, ULIPs will deliver lower returns. Subsequently, valuation of insurance firms like ICICI Prudential and HDFC Life will greatly suffer, especially when these insurance firms are preparing to raise capital from investors.     

In the investment regulations draft, IRDA commented, “No less than 25% of ULIP funds will be invested in the G-Securities. If a ULIP plan is completely equity oriented, yet a minimum of 25% must be utilized in central government securities.”

In the previous fiscal year, income generated from ULIP plans sales witnessed a substantial growth, from Rs 36,000 crore to Rs 41,565 crore. For a sector emerging from a slow growth phase, this proposal will negate the efforts, and minimize their profitability.    

IRDA contradicts the insurers view and suggests the income from the sales of this long-term product should be utilized towards infrastructure developments as laid down by the Indian Government. Moreover, the global markets pose no restriction on allocating funds in ULIP, so why should the Indian Insurance sector protest?  

ULIP is an equity investment scheme with an insurance cover. However, the insurance cover is lower in ULIP as compared to what you get by paying the similar premium towards a term insurance plan. Interestingly, if the insurance cover is 10x the ULIP premiums, investors can avail a tax benefit under Section 80C of the Income Tax Act. Furthermore, the investors can exit after 5 years. These benefits trigger investors to invest in ULIPs.

Since 2010 regulatory amendments, ULIPs have become investor-friendly. The product today offers lower brokerage commission and ensures an increased protection level, an improved premium paying termand lock-in period.

Source: This news was published on July 01, 2015 in under the title: “IRDA proposes 25% of unit-linked insurance funds be invested in government securities”

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