More power to the insured. This seemed to be the agenda for 2009 as the regulator lined up an array of measures that addressed long-standing grievances of investors. The most striking was the ceiling of 3% on overall charges of unitlinked insurance plans (Ulips) with tenures of less than 10 years, and 2.25% on schemes with longer durations. The fund management charges have also been limited to 1.5% and 1.25% of the fund value, respectively.
A favourite with investors, Ulips have gained further currency as the upfront costs are no longer steep. Don’t break into euphoria just yet. Lower charges will definitely translate into higher returns, but these come at the cost of convenience.
The reduced commission structure has cut deeply into the incomes of insurance agents. If Swarup Committee’s suggestion to phase out commissions by April 2011 is implemented, you will be completely on your own. No more daily calls till you sign the cheque, no more running around to get your documents in order or reminders of the premium payment dates. Most importantly, the policies will not be just a call away.
With power comes responsibility and the ball is now in the insured’s court. You can no longer get away with a passing knowledge of Ulips or how to invest in them. You must know it all. Plus, you have to be aware of the changes in the offing which can alter your strategy drastically.
For example, the draft of the Direct Taxes Code released in August this year has immense implications for policyholders. Insurance is a product for protection, but unfortunately, it is also popular because the income is tax-free. The bill proposes to remove this benefit on the income from all insurance plans, except those that have a premium lower than 5% of the sum assured and a tenure of more than 20 years. This means only pure protection term plans qualify. So what happens to the endowment policies, money-back plans and Ulips that you have been stacking up in the hope of tax-free income? All these are longterm commitments. If the code is accepted in its current form, most insurance policies will lose lustre in favour of other debt products that enjoy tax exemptions.
The big takeaway is not to bet heavily on life insurance policies for investment. Also, while lower charges have brought Ulips at par with mutual funds in terms of cost, the absence of tax benefits can wrench away the advantage. Similarly, contributions to the Public Provident Fund may seem more suitable than an endowment plan in terms of returns.
The one good move for investors is the extension of the minimum premium-payment term of Ulips from three to five years. Ulips give best returns in the long run. However, most people stop paying premiums after the minimum period as agents pitch Ulips as a threeinstalment investment. Now you can be assured of a more sizeable corpus at the end of the policy’s tenure.
Though the spotlight was on life insurance for most part of the year, health insurance policies were also loaded with people-friendly features. For instance, the 15-day free-look facility of life covers was extended to health insurance policies. This means you will no longer be tied down to an inappropriate health plan after paying the premium, as long as you wake up to its limitations within 15 days.
Similarly, the standardised definition of pre-existing diseases declared by Irda should remove doubts about the contentious issue. Customers will not have to check up with the insurer about exclusions every time they buy a medical insurance plan. But they will still need to understand its features.
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