Why insurance wins over mutual funds

In my previous avatar as a full-time journalist I regularly wrote against the perils of investing in unit- linked insurance plans, or ULIPs. There was almost no way of figuring out which was the best ULIP going around. The commissions were high. And you couldn't just move from one ULIP to another seamlessly as was the case with mutual funds. I also wrote about the risks of investing in endowment plans offered by insurance companies. They were a low return-high commission and totally non-transparent product. The high commissions on offer were a major reason why most agents and distributors were interested in selling ULIPs and other forms of insurance rather than mutual funds. It needs to be pointed out here that almost all of what gets sold as insurance in India is a form of investment. Term insurance, which is the real insurance, is barely sold. Over the years, the commissions on ULIPs and other forms of insurance have been coming down. Nevertheless, they still remain a popular form of investment. Why is that the case? The answer might perhaps lie in what behavioural economists call mental accounting. Richard Thaler, a pioneer in the field of behavioural economics and who coined the term 'mental a

This article was originally published on February 10, 2017.