Sea Change in Insurance


By

G.V.K. Kasthuri
Assistant Professor
R.R. Naik
Associate Professor
Integral Institute of Advanced Management
MVP Colony, Visakhapatnam
 


Market Linked Returns have become the norm today. This is the reason why insurance companies launch Unit Linked Plans with different terms. Important thing is that it stands competitive not only to other insurance products, but also to mutual funds. To gain market power and to protect or enhance profitability. The product must be a little de4veloped. A Unit Linked Plan provides an opportunity for the discerning investor to benefit from the returns available in the capital market without going for direct investment in the capital market. Middle age group people prefer Unit Linked Plan because as they want to take more return by taking risk and to save for future. More plans are to be formulated which assure more capital growth with less risk.

The insurance sector in recent past has seen sea change. Customers are now more and more informed and are no more satisfied with traditional policies which are pre-bundled. Keeping this in focus, the latest Unit Linked Plans have been introduced in the market "Unit Linking" is a concept of linking customers investment to the market" Linking implies matching. The value of the policy is linked to the value of net assets of the fund.

Introduction:

A Unit Linked Plan provides an opportunity for the investor to benefit from the returns available in the capital market without going for direct investment in the capital market. This paper deals with the customers' awareness and their interest towards income, growth and balanced fund. It also deals with how it varies from Mutual funds.

Similarity with Mutual Funds: Unit Linked Insurance plans are essentially similar to Mutual Fund products where in the premium is invested in various funds in keeping with policy holders' risk appetite. However the difference in a mutual fund investment is that the money is virtually at call by the customer. In case of Unit Linked insurance plans, it is impossible to predict whether the market will be in an upswing on the day of the policy holders' death or on maturity. The Net Asset Value will reflect the underlying value of assets, which in turn is dependent on the movement of the SENSEX.

Traditional Vs. Modern Insurance Plans: Any insurance companies plan have two components:

  • Company
  • Customer

If the company takes all the risk on investment and passes all the benefits to the customer, then the risks of investment lies with the company only. All traditional plans like endowment, money back, etc., are such plans. However, if the customer shares the risk of investment, then it is called as universal plan. All linked plans are universal plans. Here, the customer decides where to invest his money and for how long. So, the focus is on the company and overall customers. Apart from the basic difference, there are certain other advantages of Unit linking too.

ULIP guidelines by IRDA: The regulator- insurance and development authority (IRDA) finally introduced some much needed guidelines.

1.Term: the ULIP client  must have the option to choose a term and must have a minimum tenure of five years.

2.Sum  assured: Sum assured may be calculated as term/s "annual premium or five annual premiums whichever is higher. There is no clarity with regards to the maximum sum assured. The sum assured is treated as sacred under the new guidelines; it cannot be reduced during the term of the policy except under certain conditions like a  partial withdrawals after sixty years of age. This way the client is at ease the sum assured at his disposal.

3. Premium payments: if less then the first three years premiums are paid, the life cover will lapse and policy will be paying the surrender value. However, if at least, three years premiums have been covered would have to continue at the option of the client.

4. Surrender value : The surrender value would be payable only after completion of three policy years.

5. Top Ups: Insurance companies can accept top ups only if the client has paid regular premiums top up amount exceeds 25% of total basic regular premiums paid till date, then the given certain percentage of sum assured on the excess amount. Top ups have a loss (unless the topups is made in the last three years of the policy.

6. Partial withdrawals: The client can make partial withdrawals only after three policy years.

7. Settlement: The client has the option to claim the amount accumulated in his account after maturity. The policy up to a maximum of five years. For instance, the ULIPs matures on 1st January, 2012 has the option to claim the ULIP bonus till as late as 31st December, 2012.

8. Loans: No loans will be granted under the new ULIP.

9. Charges: The insurance company must state the ULIP charges explicitly. They must also give deduction  of charges.

10. Benefit Illustrations : The client must necessarily sign on the sales benefit illustrious. These illustrious, a client by the agent to give him an idea about the returns on his policy. Agents should show an optimistic estimate of 10% and a conservative estimate clients have to sign on these illustrations, because agents are violating these projections projecting higher returns.

ULIPs initiated in ?

ULIPs were first offered in US in 1976, after being developed and sold successfully in the Netherlands, England and Canada in the name of Variable Life Insurance. Basically it was a type of whole life insurance whose values may vary directly with the performance of a set of earmarked investments.

Special features of  ULIPs:

1. Transparency: The Unit Linked Plans are said to be transparent because the client knows exactly how much of his money goes in charges and how much for investment. Also investor is able to know where his money is being invested. Everyday NAVs are declared and he comes to know either by Television or print media. As to how the funds are performing.

2. Customer friendly: these plans are more customers friendly as they allow customer to access money after three years instead of waiting for a very long time. As and when customers' income levels increase or decrease, he has  a choice to increase or decrease the premium he invests. The exit options are available after lock-in-period of three years. Due to the above reasons, the Unit Linked Plans are said to be more customer friendly.

3.Flexibility:Individual may well ask how ULIPs are any different from Mutual Fund. After all, Mutual Funds offer hybrid balanced schemes that allows an individual to select plan according to different needs.

4. Works like SIP: Rupee cost averaging is another benefit associated with ULIPs. Individuals already heard of the "Systematic Investment Plan" (SIP) which is increasingly being already heard Mutual Fund industry with an SIP, individuals invest their money regularly overtime month/quarter and don't to worry about "timing the stock markets these are peculiar to Mutual Funds. Not many realize that ULIPs also tend to do the same quarterly/half-yearly basis. As a matter of fact, even the annual premium in a Unit Linked Product work, cost averaging principle and added benefit is that individuals can also invest amount in the ULIP either to benefit from other opportunities in the stock market of investible surplus in a particular year that they wish to put aside for the future.

Risks in ULIP policies may be listed out like this:

  • The chances of dying in an index downturn.
  • It may not be possible to replace the economic value of an individual to their dependants with these policies.
  • It is not appropriate for a 35 year old middle class man to bet his last penny on the direction of the market.
  • It may not be prudent to link the money an individual wants to leave behind for family to the whims and fancies of stock market mechanics?
  • It may not be appropriate to consider insurance as a means to make big bucks.
  • All risks like portfolio management, reputation risk, environmental risk, systematic risk, credit risk, liquidity risk, etc., may effect ULIP returns.

How ULIPs workout to insurance companies, where premium is paid just for three years of  5 years? ULIPs were shown to be a short cut investment/ insurance avenue-were encouraged to pay premiums only for the first three years and not necessarily over the policy. The reason is because the expenses in the initial three years premium insurance companies recover the entire cost of the policy.

What part of your premium will be invested? Premiums can be paid quarterly, half yearly or yearly. These plans give an option to the investor to choose between three fund options –debt, equity and balanced.

Insurance companies charge anywhere between 20-35% as upfront charges for their Unit Linked Plans. So, every time you make your premium payment, only a part of it is actually invested in the fund of your choice.

How to access your money?

    1. On maturity: Policy matures at the end of the policy term of the policy chosen covers death and other risk will be covered. Balanced units may be redeemed at the prevailing unit price and take the fund value.

    However, policyholders also have an option to take fund  in periodical instalments over the period which may extend to five years.

    This is called the "settlement option". Money will remain invested in the funds chosen during such period, company will continue to deduct charges other than the risk benefit charges such as the mortality charge. At the end of this five year period, one can redeem the balance units as the then prevailing unit price and pay the fund value. Policy will terminate the moment the balance of units in all the funds reaches zero.

    2. On death: In case of one's unfortunate demise before the end of policy term, company will pay the greater of the sum assured (less any withdrawals made during the two year period immediately preceding the intimation of death) and total fund value the family and policy will terminate thereafter.

    3. On critical illness: In case one is diagnosed with any of the critical illness covered before the end of the policy term, company will pay the greater of the sum assured (less any withdrawals made during the two yer4a period immedtely preceding the intimation of the diagnosis) and total fund value to the family and policy will terminate thereafter.

    4. On surrender or partial withdrawal: In the first three years Insurance plans are long-term investments with significant tax advantages. Neither the IRDA nor the company view them as short-term plans.

Therefore, for the first three years known as lock-in-period, one may not surrender the plan or withdraw any portion of the funds from it. If one stops regular premium commitment before three years, live cover will cease and funds will be paid out to the policyholder only at the end of the third year or the end of the revival period of two years, whichever is later. From the fourth year onwards, one can choose to surrender the policy at any time and the surrender value will be value will be value of the units in the fund. The company will enforce surrender only if one stopped paying regular premium account.

One can make lump sum partial withdrawals from the funds at any time within the policy term chosen  provided:

  • The minimum withdrawal amount if Rs.10,000/-
  • After the withdrawal, the fund does not fall below one's original annual regular premium amount.
  • After the withdrawal, the fund does not fall below the sum of the single top-ups paid to date.
     

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Source: E-mail January 18, 2011

          

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