If you walk into a cafe and ask for coffee, you will face a barrage of questions. Cappuccino, latte or mocha? Decaf? Indian, Italian or Brazilian? Regular or tall? You wonder if so many options are really necessary. And then you hear someone order a “decaf cappuccino with Arabica coffee, regular, little foam”. Therein lies the answer. If customers are given a choice, they will usually choose something that works just right for them.
Everyone likes to enjoy the benefits of choice and to be able to decide what’s best for them. This is as true of the big things in life (career or city) as the smaller joys (clothes or holidays). It should be the same when it comes to savings and investments. Since we all save to achieve the bigger goals in life, it is important that our investments are purely on the basis of our needs and risk profile, and are transparent to the extent that we know what we are paying for and what we are getting.
Are you buying insurance when you should be investing? Have you established how much of each you need? You should be able to buy investments and insurance on the merit of each product and in a combination that meets specific financial goals.
Unit-linked insurance plans (Ulips) offer a good combination of risk cover and the opportunity to invest in securities. However, there is a drawback in the way they are structured—the customer has effectively no choice in the investment that comes bundled with insurance, except to define the proportion in which it is invested in debt and equity.
This is where wrappers come in. Wrappers are extremely popular in more mature markets like the US and the UK because of the twin benefits they offer. The wrapper structure provides ample choice of mutual funds for the underlying investment, and places, or wraps, these investments around a life insurance policy. In the US, wrappers go by the name of variable annuities and are annuity contracts wrapped around a set of mutual funds. Issued by insurance companies, these contracts allow investors to accumulate assets on a taxdeferred basis for retirement or other long-term goals. In the UK, wrappers are called insurance bonds or investment bonds and come with tax benefits.
While the Ulip structures in India appear similar, the big difference is that the investor has no say in choosing the funds or fund providers. Moreover, such products score low on cost competitiveness. Some fund houses have introduced funds along with insurance, but these too ignore the customers’ need for choice because it is a bundled product.
Insurance wrappers provide an optimal structure that can give investors the best of both worlds. Currently, regulation in India does not allow for a wrapper structure, but once in place, insurance companies and fund providers can jointly offer as near a customised product as possible by allowing customers to choose the right mix of risk cover wrapped around professionally managed funds.
This pick-and-mix freedom can allow investors and their advisers to select wrappers on the basis of their suitability rather than their availability.
Ashu Suyash, Managing Director and India Head, Fidelity International