Two basic questions that you ask when buying any product are: what does it cost and what does my money buy me. Ask the same questions when buying a financial product and you get different answers depending on which product you are buying. A market-linked investment product, like a mutual fund or a unit-linked insurance plan (Ulip), will give indicative returns or will rely on past returns to answer the ‘what does it return’ question. A fixed deposit will simply indicate the returns the product gives. A traditional life insurance plan will never answer this question directly but will obfuscate cleverly. Ask ‘what it costs’, and you see that an equity mutual fund in India charges an annual fee of 2.5%. A Ulip costs 4% a year if held till year 5 and costs drop to 2.25% if held for more than 10 years. But ask the question for traditional insurance plans and you draw a blank. Insurers and regulators have both expressed helplessness in getting an industry average handle on these costs because of the nature of the product. Each policy is different and there are more than 40 million policies issued each year; whose cost should we give you? When put like this, of course, there is no answer possible. It is a difficult problem to solve because, unlike a Ulip, traditional plans do not segregate funds according to the two functions of risk cover and investment, but put the entire money into one pool. There is no segregation of the pool across time—the older money and new money all goes into the same pool.
Monika Halan's blog 