If you had gone to an agent to buy an insurance product around this time last year, most certainly he would have advocated hard that you should go for a unit-linked insurance plan (Ulip). For, this would achieve the twin purpose of life protection and market-linked growth for your investment.
Fast forward to date, chances are that the same agent would make a strong case for a traditional endowment policy or pure-protection term plan as a better option. Reason for this drastic change in advice: significant reduction in the distributor's commission under the new guidelines for Ulips that came into effect in September 2010.
EXPERT VIEW:Which is better? Mutual Fund+term plan or Ulip
"There is a clear tilt in favour of traditional plans. This serves the intermediaries better as they get higher commissions (up to 40% of the yearly premium)," says Kamalji Sahay, managing director and CEO, Star Union Dai-ichi Life Insurance.
"The upfront charges are now uniformly distributed over the five year lock-in period, so, a good portion of the first year premium will be invested, which was absent in the earlier plans," says Arvind A. Rao, a certified financial planner . In the earlier regime, 60-75% of the first year premiums were at times allocated to charges, leaving little for investment.
It is a whole new Ulip world today. "The new regulations ensure that Ulips are being promoted as a long-term protection and savings tool. The greater focus on protection (minimum sum assured should now be at least ten-times the yearly premium paid) and long-term orientation (lock-in period increased from 3 years to 5 years) will enable the customer to build in protection as the core component," says John Holden, chief executive officer, Canara HSBC OBC Life Insurance."Compared to old Ulips, the new ones stand out in terms of features. They provide better avenues for wealth creation along with adequate cover. With reduced cost structure, there is more that gets invested," adds Om Ahuja, Head-Private Wealth Management & Strategy, Emkay Global Financial Services. There were certain loopholes in the earlier products, especially the way they were being marketed.
"Ulips were mostly being sold as short-term investment products whereas they were designed to give substantial returns only in the longterm. Sometimes, the charges were loaded up-front, that is, the chunk of the customers' money was billed as fees during the first few years. So, policy holders were unable to reap the benefits of compounding," says Madhivanan Balakrishnan, executive director, ICICI Prudential Life Insurance. Companies had to revamp old Ulips and launch new ones to comply with the regulations.
"There was some negative growth post September. The industry was adjusting to these changes," adds Rajiv Jamkhedkar, MD and CEO, AEGON Religare Life Insurance.
"The new Ulips stand out in terms of flexibility and cost. They provide better avenues for wealth creation along with adequate life cover."
Head-Private Wealth Management, Emkay Global Financial Services
Ulips are a good option for the notso-savvy investors. "Not everyone has the capability to handle portfolios prudently. But anyone can buy a Ulip, stay invested for a long and enjoy the life cover and simultaneously reap the benefits of equity or debt investment made by experts," adds Sahay.
The new norms have brought about a lot of standardisation to the offerings by the companies. So, it might not be easy to pick a plan amongst the new Ulips. Out of the new lot, we help you find the plan that suits you best.Here are some simple points to look at before you pick a new Ulip.
Life cover should be the most important component of all benefits in a life insurance product. And the right life cover needs to be worked out on the basis of your age, income, dependents, etc. Since all these parameters keep changing, your insurance needs also change.
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Though the regulator has standardised the minimum life cover, there is no upper-limit to this. Given that we can never be sure about the future, it is wise to choose a product that gives you the maximum flexibility.
"The product should give flexibility to change the premium payment terms, the sum assured, choice of premium payment frequency and the option to add riders to the policy," says Akshay Mehrotra, CMO, Policybazaar.com. Moreover, look for optimum flexibility in asset allocation as this can play a key role in determining returns in the long-term. Pick Ulips that offer the most free switches and redirection options in a year.
Apart from product features and benefits, there can be a large difference in the maturity payout, depending on the performance of the fund. Check the track record of the fund before you part with your money. Since new Ulips were launched post-September, most of them would not have completed a year. Thus, at present, it would be better to look at the absolute returns instead of calculating an annualised return.
Premium allocation charge
A charge deducted before making an investment from your premium.
Policy administration charge
Fund management charge
There is always a possibility of striking a cheaper deal. So, do not forget to compare.
The maximum reduction in yield at maturity, that is, the difference between the gross yield and the net yield has been capped at 3% for policies whose tenure is less than or equal to 10 years, whereas, for plans whose tenure exceed 10 years, the total charges can't exceed 2.25%.
"This means a customer will definitely get an IRR (internal rate of return) of 7.75%. Lot of schemes have shaved costs to such an extent that they are giving an IRR of above 8%, which means the total cost is less than 2%," informs Jamkhedkar.
Moreover, premature exists have been made less painful. "In case of early surrender, penalty is capped at Rs 6000 for premium above Rs 25,000 per annum and Rs 3, 000 for anything below that. A surrender charge lower than this will help in case you are forced to exit the policy before its maturity," says Pallav Sinha, MD and CEO, Fullerton Securities and Wealth Advisors.
However, we suggest investors continue all their policies to maturity and reap benefits of bonuses and compounding effect.
You have done extensive research and compared countless products to pick the perfect policy. But all your efforts would go invain if the policy is not able to come to your help or to your nominees' help when it is needed the most.
It is very important that you choose an insurer who not only has a high-quality product but provides good after-sales services as well. Looking at the claim settlement ratio, that is the number of claims settled with respect to claims received, can be one way to ensure smooth processing of your claims.
One can only get all the above information if only the insurance company has disclosed them on their website and product brochures. Though the Irda has stipulated norms on what all information needs to be provided to the customers (as mentioned in ranking methodology), not all companies follow the guidelines in full. This also, in a way, reduces the company credibility. The better the policy disclosure, the better are the chances of any investor to comprehend the policy and go for it.All these factors may right now seem like few simple points to remember. However, we all know that it is easier said than done. That too, when you literally have a multitude (there are over a hundred Ulips available in the market) of products to choose from.
Therefore, we tried to make this task somewhat easier for you by ranking these products in the following section. Ulips have been given scores considering all the above parameters in the MONEY TODAY Rupeetalk.com rankings of the new Ulip products in India (see ranking methodology on pg 00). For the long haul: With a five year lock-in, the Irda has given a very clear message: the Ulips are for investors who are ready to remain invested for the long-term.
"The new Ulips are best suited for protection plus investment for longer tenures such as ten years or more," says Holden. So, if you are looking for returns in, say, next two to three years, the mutual fund route will suit you better .
"A longer lock-in period also means that a customer intending to take advantage of an upward swing in the stock market by encashing units may not find this product favourable," says Sahay of Star Union Dai-ichi Life Insurance.
Since the new Ulips provide a much better value proposition for the customer, should you discontinue your old unit-linked policy to buy the improved avatar? "Surrendering old plan will attract a charge which is not recommended.
The other critical point one cannot ignore is that the old policies carried higher allocation charges in the initial years and lesser in subsequent years. Thus, if the investor has already taken the burden of higher allocation charges in his earlier policy, there is no merit in this conversion exercise," says Ahuja. Not to forget, although reduced, the new policy will still have some entry charges.