Life cover premiums dip 28% in June quarter

In another sign of weakening investment environment, the life insurance industry witnessed a 5 per cent decline in its total premium collections for the quarter ended June on the back of a sharp fall in new business premium during the quarter even as the renewal premium witnessed a double- digit growth.

According to the data released by the Life Insurance Council on Monday, the industry witnessed a 28 per cent drop in its new business premium from Rs 25,522 crore last year to Rs 18,282 crore by the end of June 2011. The industry, however, witnessed a 13 per cent rise in its renewal premium from Rs 32,959 crore in the quarter ended June 2010 to Rs 37,221 crore in June 2011.

The total collection for the industry dropped from Rs 58,559 crore to Rs 55,523 crore.

The industry, however, saw its total assets under management (AUM) cross Rs 15 lakh crore mark to touch Rs 15,04,629 crore against Rs 13,50,850 crore last year.

Experts say that Ulip investments have gone down.

“Investors are very wary of the market now,” said SB Mathur, secretary general, Life Insurance Council. “The total premium collections show a dip because last year the numbers in the first half grew very sharply and thus the base grew high. I expect that the numbers for the full year will be in line with what they were last year.”

The insurance industry grew aggressively in the first five month of 2010 (between April and August) as they anticipated the change in the Ulip guidelines from September 1, 2010.

“If you consider the new business premium collected in last two years for the same period, the industry’s premium collection has grown at 13 per cent CAGR despite a fall this year,” said the Life Insurance Council statement.

The industry has also witnessed a fall in the number of its insurance agents by around 4 lakh as it has come down from 28.16 lakh last year to 24.27 lakh now.

Experts say that companies are unwilling to retain less productive agents now.

The life Insurance industry’s contribution to infrastructure development however continues to be robust and the investment in infrastructure has risen to Rs 2,00,235 crore from Rs 1,42,445 crore.

In need of a lifeline

* Life insurance industry witness 5% decline in its total premium collections for the quarter ended June

* Renewal premium, however, witness 13% rise from Rs 32,959 crore in the quarter ended June 2010 to Rs 37,221 crore in June 2011

* Total collection drops from Rs 58,559 crore to Rs 55,523 crore

* Ulip investments down, say experts

Max New York Life expects new Ulip norms to dent its margins

Max New York Life Insurance, a private insurer, is expecting a significant fall in business margins and profitability after the new unit-linked insurance plan (Ulip) norms became operative beginning September 2010.

“At a time when the industry is struggling with regulatory changes, we have done very well. But, certainly, there will be an impact on margins. Even though we have done better than the industry, we expect margins to fall from 19 per cent last year to 13 per cent,” said Rajesh Sud, CEO, Max New York Life Insurance.

In a bid to put a break on the rampant misselling of Insurance products by companies and insurance agents, the Insurance Regulatory and Development Authority (Irda) tightened the guidelines for Ulips.

These guidelines made previous Ulip schemes sold in the market redundant and the insurers were asked to launch Ulips based on revised norms. Till last year, 90 per cent of new business sales of life insurance industry came from Ulips. Now, share of Ulips in overall sales has fallen to 70-75 per cent. These new guidelines squeezed excess margins from insurance companies and forced insurers to look beyond Ulips.

Max New York Life Insurance received total new business premium of Rs 2,059.33 crore in financial year 2010-11, compared with 1,847.77 crore in the previous year. Max New York Life has done better than the life insurance industry due to lesser dependence on Ulips. The company gets more than 40 per cent of new business premium from traditional plans.

Max New York Life is also expecting to wipe out its accumulated losses of Rs 800 crore and break even by 2013.

Max New York Life Insurance hopes to wipe off accumulated losses

Max New York Life Insurance (MNYL) which registered a net profit of Rs 283 crore for 2010-11, hopes to wipe off its entire accumulated losses in the next couple of years.

"It is our second year of profit and we will need a couple of years to wipe off our entire accumulated losses and break even. The total accumulated losses is about Rs 860 crore," chief and executive officer and managing director, Rajesh Sud told ET. During 2009-10, the company registered its first ever net profit at Rs 24 crore on its ninth year of operation.

"Total premium income during 2010-11 was Rs 5,813 crore which was a 20% growth over the previous fiscal, first year premium recorded a growth of 11 % over previous year to Rs. 2,061 crore and its total sum assured stood at Rs 1.54 lakh crore – a 26% year-on-year growth," said Sud.

Renewal premium income grew by 25% over previous year to Rs. 3,751 crore in 2010 11. Assets under management rose to Rs. 13,836 crores, a growth of 37% over last year. The cost to premium ratio improved 400 basis points to 38%. IIT Kanpur

With the company starting to make profits, capital infusion requirement by the promoters are likely to come down in the next couple of years. "The current capital base of MNYL is Rs 1976 crore. Our solvency ratio is 365% and we will not require additional capital this year," said Sud.

Since September 2010, after the implementation of new ULIP guidelines, Max New York Life performed significantly better than the industry average reflecting the inherent strengths of the company's business model.

LIC south region sees 50 pc premium growths in FY11

The Life Insurance Corporation (LIC) of India's south zone, which covers Andhra Pradesh and Karnataka, has registered a total new premium income of Rs 13,000 crore in 2010-11, which represents a 50 per cent growth over the previous year.

According to AK Sahoo, zonal manager (south zone), LIC, around Rs 7,700 crore of this came from group schemes. It had settled 2.2 million claims in the year amounting to Rs 7,000 crore.

He told reporters that conventional policies were on the rise compared to unit-linked insurance policies (Ulips), with the ratio for LIC at 60:40. The recent regulations requiring a five-year lock-in period and a minimum guarantee of return had made ULIPs less popular, Sahoo said, adding that conventional policies were the flagship products of LIC.

Earlier, he launched the LIC Jeevan Arogya health plan, the public sector insurer's third health cover scheme in the conventional category. It offers hospitalisation benefits for parents-in-law of the insured person, in addition to his/her spouse, children and parents.

As a defined benefit policy, it would offer the benefits as a lumpsum irrespective of the cost of surgery and whether the insured is reimbursed under any other scheme.

It covers 140 major surgeries, and is available with an initial daily benefit of Rs 1,000, Rs 2,000, Rs 3,000 and Rs 4,000. The maximum surgical benefit would be 100 times the daily benefit. Premiums would depend on age, gender and the health cover option, among others.

Birla Sun Life expecting revenue for the first time

Birla Sun Life Insurance, which is in its tenth year of operation, is expected to report profit for the first time for the year 2010-11. Changes in regulatory requirements regarding unit-linked insurance plans (Ulips), effective from September 1, 2010, have not had much impact on the company’s margins.

Life insurance business has a high gestation period and the companies do not report profit in the first few years of operation.

“The company reported profits in the first nine month period ending December 2010. Despite changes in regulations, we have done well. We do not foresee any contraction in margins in our business. We will have three to four per cent edge in margins over the industry. I can not share exact details. The company will come out with results in a few days,” said Mayank Bathwal, CFO, Birla Sun Life Insurance.

“We feel the business opportunity in life insurance is still very high. Now the product is much more attractive for customers. One just needs to find a profitable formula to adequately compensate distributors,” he added. Average commission paid to agents has fallen to 6-7 per cent of the premium post September 1, 2010 compared to 15 per cent earlier.

However, the product mix of the company has drastically changed in favour of traditional plans. Composition of Ulip in new sales has fallen to 55 per cent in 2010-11, from over 95 per cent in the previous year.

“There was a big change in regulations, but now the momentum is coming back. We see a good positive trend month after month. We are moving fairly quickly where we can start showing growth,” said Bathwal.

The company is also looking into its distribution model. At present, 70 per cent of new business is generated from its agents, 15 per cent from bancassurance (its partner banks which sells Birla Sun Life Insurance products) and the rest from brokers. “We want to increase sales from non-agency channel. It is our focus to have a much better distribution mix,” said Bathwal.

Star Union introduces two new plans

Star Union Dai-ichi Life (SUD Life) on Wednesday introduced two new product offerings, one in the unit-linked insurance product (ULIP) segment, Dhan Suraksha Express, and another in the traditional category, Defined Growth Endowment Plan. It also announced that it has accumulated over Rs.1, 329 crore of new business premium in just over two years of its operations.

“We procured Rs.758 crore new business premium during 2010-11, registering a growth of 46 per cent over the previous year. Total premium income (including renewal premium) of the company was Rs.933 crore, which was 76 per cent up over the previous year.

“We have sold 97,730 individual policies and covered over 3.5-lakh lives under group schemes. We have also exceeded our mandatory commitments under social and rural business obligations prescribed by the regulator,” SUD Life Managing Director and CEO Kamalji Sahay told journalists here.

He said the company started business with just Rs.250 crore of capital contributed by the three promoters, Bank of India, Union Bank of India and Japan's Dai-ichi Life Insurance. However, the company has not required fresh capital infusion in spite of being one of the fastest growing companies.

INNOVATIVE OFFERINGS

“With our increasing success we have also continued to add value to our customers by providing them a bouquet of innovative product offerings.

“For SUD Life, customer satisfaction and product innovation are the two key drivers and our results for the year are reflection of our commitments to our goals,” Mr. Sahay added.

What are the costs concerned in a life insurance policy

Not all life insurance policies disclose their charges to policyholders. Traditional insurance policies do not disclose the charges. Unit-linked insurance products (Ulips) are more transparent about the charges. The various charges on an Ulip include:

Premium allocation charge (PAC): It is a percentage of the first year premium, adjusted before investing or allocating the units. It is a fee that you pay for servicing and maintaining your policy. This percentage is generally higher in the first few years and varies from one company to another. Say, your premium allocation charges are 30 per cent and your total premium is Rs 1, 00,000. Then, Rs 30,000 is first deducted as PAC and Rs 70,000 is invested.

Policy administration charge: It is levied for running or managing your policy. You could either be charged a flat fee throughout the policy term or a percentage of the premium.

Fund management fee: It is deducted for managing the funds, calculated on the net asset value of the fund invested in. The fee is charged as a percentage of the assets under management, typically anywhere between 1-1.35 per cent. It is calculated on a daily basis, which is reduced on an annual basis.

Mortality charge: It is the cost towards providing death benefit to the policyholders. It is only charged if your policy has a life cover.

The optional charges on Ulips are:
Rider charges: These are additional or supplementary benefits, bought over and above the main life insurance plan or the base plan. For example, if you opt for a critical illness rider, the charge on it will vary from one company to another.

Fund switching charges: You are allowed a fixed number of free switches in Ulips each year, after which you are charged for the subsequent switches. Most Ulips do not charge for the initial five-six, or even eight, switches at times. For more than this, they may charge anywhere around Rs 50-300.

How do you know your policy charges?
You can know about the various charges by going through your sales benefit illustration, which will tell you the various charges year by year. The policy brochure will illustrate the various charges. Your advisor can also tell you about these.

How often does one incur these costs?
PAC is deducted upfront from the premium paid by the insurer on a yearly or monthly basis, depending on the company and your premium paying frequency. Policy administration charges are on a monthly basis, where they deduct a part of the units you hold. The mortality charge (for a month) is picked up from the mortality charge table and multiplied with the net amount of risk under the policy, which is deducted from the policy account.

LIC set to employ brand consultant

The country's largest financial institution, Life Insurance Corporation of India, has decided to appoint a brand consultant to ensure that it appears as a tech-savvy institution to the public.

LIC has invited expressions of interest from consultancy firms to 'create further value for the strong LIC Brand'. Among other things, the corporation is seeking advice on brand strategy and support on brand tracking and media audit.

Speaking to ToI, a senior LIC official said that although LIC has one of the largest in-house technology teams with over 140 programmers, it does not have the image of a tech-savvy company. The brand consultant would change that.

"When it comes to number of customers, we are the largest life insurance company in the world and we make extensive use of technology to manage such a huge customer database," he said. With assets under management of over Rs 11, 00,000 crore, LIC is the largest financial institution in the country.

"Our ULIP portfolio is also larger than the portfolios of most mutual funds in the country. Yet not many are aware of this" he added. The corporation spends close to Rs 250 cr a year in advertising but this amount is much lower than its market share of revenue. "We are close to 75% of total premium, but in terms of adspend we are probably 25%" said an official.

India to be along with top 3 life insurance markets by 2020

The insurance industry will continue to outpace the rapid economic growth to reach $350-400 billion in premium income by 2020, making India amongst the top three life insurance markets and top 15 non-life insurance markets by the year, a study said.

It stated that the total penetration of insurance (premium as percentage of GDP) has increased from 2.3 per cent in 2001 to 5.2 per cent in 2011. In addition, there has been a vast increase in the coverage of insurance.

“The number of life policies in force has increased nearly 12 fold over the past decade and health insurance, nearly 25 fold,” according to a Ficci and the Boston Consulting Group (BCG) report titled ‘India Insurance — Turning 10, Going on 20’.

This progress has been aided by the dramatic shift in the availability of products, for example: better term, ULIPs, whole life, maximum NAV guarantee, auto assistance, auto pay per km insurance, disease management and wellness.

aid Rajiv Kumar, director general, Ficci, “The report estimates the total insurance premium at approximately Rs 17 lakh crore to Rs 22 lakh crore in 2020 (with life being Rs 15 lakh crore to Rs 20 lakh crore). This massive growth will have a significant impact on India’s ranking in the global insurance industry and is based on strong fundamentals.”

“While the industry has come a long way over the past decade, the big challenge with the industry is profitability. Private life insurers have accumulated losses of over Rs 16,000 crore till March 2010. Similarly, the non-life industry has cumulative underwriting losses of nearly Rs 30,000 crore,” said Alpesh Shah, partner & director, BCG India and author of the report.

The report highlights the importance of insurance in India’s economy, the progress made in the last decade, key challenges associated with the sector and an action agenda for insurance companies and the government,” said Sandeep Bakhshi, chairman, Ficci’s insurance and pensions committee and managing director & CEO, ICICI Prudential Life Insurance Co Ltd.

Progress has been made on the channel front with the emergence of five distinct channels — bancassurance, broking, corporate agency, direct and auto dealers to complement the existing third-party agency and in-house salaried sales force.

“Along with the emergence of multiple channels, the distribution reach has increased manifold, nearly 6-fold for life, and 1.5 times for non-life. During the same time, the Indian market has evolved from a monopoly to a truly competitive market,” the study said.

IRDA issues new rule on telemarketing

Telecallers of insurance products should be trained according to the syllabus prescribed by the Insurance Regulatory and Development Authority (IRDA) and they should inform clients that the call is being recorded and that the client is free to a voice copy, according to the new guidelines issued by the insurance watchdog.

“The training shall be for duration of not less than 25 hours as per syllabus to be agreed by IRDA in matters related to regulations, disclosures, ethical conduct of business and specific instructions to be complied with while making the calls,” IRDA said.

The new guidelines on telemarketing and distance mode marketing shall come into force from October 1. The hours during which calls are made shall be in agreement with the orders issued by TRAI/DoT from time to time.

In all, instances where a policy is issued without obtaining a proposal in physical form, the insurers should provide a verbal transcript of the voice/electronic record of the queries raised and answers on the basis of which the policy has been underwritten, along with the policy bond, the order said.

“No inconvenience, nuisance or harm shall be caused to the clients in the course of solicitation or thereafter. Full disclosures shall be made to the clients under all modes of distance marketing and the requirements of confidentiality, privacy and non-disclosure shall be complied with,” it said.

Also, insurers shall not solicit ULIPs of non-single premium type for annualized premium exceeding Rs 50,000 over telephonic mode (voice as well as SMS). Single premium ULIPs shall not be solicited for a premium of more than Rs 1, 00,000 over telephonic mode.

The insurance watchdog has also banned selling or soliciting variable insurance product over distance marketing mode.

The records pertaining to every call made and SMS sent by a telemarketer/corporate agent/broker that materialises into a policy shall be transferred to the insurer’s location within 30 days of conclusion of sale. In the case of telephone calls, the records transferred shall be the recordings of the entire conversation.

Insurers/brokers shall monitor the calls live by arranging for listening to at least 1(%) per cent of the calls as they happen.

Insurers shall verify at least 3(%) per cent of the calls leading to sales for compliance with the guidelines, by engaging a team of dedicated employees to listen to the call recordings.

The observations made in the course of verification should be preserved in a retrievable form for a period of not less than three years, IRDA added.

IRDA issues new rule on telemarketing

Telecallers of insurance products should be trained according to the syllabus prescribed by the Insurance Regulatory and Development Authority (IRDA) and they should inform clients that the call is being recorded and that the client is free to a voice copy, according to the new guidelines issued by the insurance watchdog.

“The training shall be for duration of not less than 25 hours as per syllabus to be agreed by IRDA in matters related to regulations, disclosures, ethical conduct of business and specific instructions to be complied with while making the calls,” IRDA said.

The new guidelines on telemarketing and distance mode marketing shall come into force from October 1. The hours during which calls are made shall be in agreement with the orders issued by TRAI/DoT from time to time.

In all, instances where a policy is issued without obtaining a proposal in physical form, the insurers should provide a verbal transcript of the voice/electronic record of the queries raised and answers on the basis of which the policy has been underwritten, along with the policy bond, the order said.

“No inconvenience, nuisance or harm shall be caused to the clients in the course of solicitation or thereafter. Full disclosures shall be made to the clients under all modes of distance marketing and the requirements of confidentiality, privacy and non-disclosure shall be complied with,” it said.

Also, insurers shall not solicit ULIPs of non-single premium type for annualized premium exceeding Rs 50,000 over telephonic mode (voice as well as SMS). Single premium ULIPs shall not be solicited for a premium of more than Rs 1, 00,000 over telephonic mode.

The insurance watchdog has also banned selling or soliciting variable insurance product over distance marketing mode.

The records pertaining to every call made and SMS sent by a telemarketer/corporate agent/broker that materialises into a policy shall be transferred to the insurer’s location within 30 days of conclusion of sale. In the case of telephone calls, the records transferred shall be the recordings of the entire conversation.

Insurers/brokers shall monitor the calls live by arranging for listening to at least 1(%) per cent of the calls as they happen.

Insurers shall verify at least 3(%) per cent of the calls leading to sales for compliance with the guidelines, by engaging a team of dedicated employees to listen to the call recordings.

The observations made in the course of verification should be preserved in a retrievable form for a period of not less than three years, IRDA added.

Insurance to be available on Cell phones

India First Life Insurance is a joint venture among Bank of Baroda, Andhra Bank and UK-based Legal & General. They stepped late in the insurance sector but have done well in bancassurance model. P Nandagopal is the managing director and CEO of India First Life Insurance.

Business strategy for growth:

· He believes that since they are a new company and have entered late into the insurance, they can start afresh. There strategy will take into account the new regulatory changes right from the start. Their balanced approach will not be affected by the changes in regulation.

· They will be completing one year of operation this month. They boast of R600-700 crore worth of insurance policies sold in the very first year of business

· Their product mix comprises 90% of Ulip and remaining are traditional products. Total assets under management (AUM) is at R1,000 crore, 60% of which was constituted by Ulips.

· While many insurers are reducing the share of Ulips contribution in their growth portfolio, India First Life Insurance plan to continue to focus on Ulip products, rather than non-transparent and highly priced traditional products in future too. As they believe that even the traditional products bear risks.

· They don’t believe in technical differentiation of products but believe in creation of need-based product base. This does not mean that they don’t want sales from saving products rather they want to keep at least 30% of sales from savings products; 15-20% of revenue from health products; 30% from pension schemes and 20% of investment products.

· India First Life Insurance plans to launch three to four products during the next financial year and half of them will be Ulips. They may even launch Ulip-based pension products, (provided Irda liberalizes few of existing pension norms).

· 65% of company funds are invested in equities and remaining in debt.

· Currently, they have 1,200 employees and plan to add 300-400 staff during the next financial year.

· More than 95% of their sales come from bancassurance channels, which are operated through 3,000 branches of Bank of Baroda and Andhra Bank. They are eager to make their presence felt across all 5,000 branches of the two banks in coming three years.

· Their plans include reducing their dependence on bancassurance by two third in three years as well.

· IndiaFirst just launched its digital channel ‘LifeStore’ which is a do-it-yourself site that helps customers complete their insurance requirements online. They are even working towards making policy transactions possible over cell phones in near future.

Indian Bank support for life insurance foray

Indian Bank has officially initiated its foray into the life insurance business with the invitation of request for proposal (RFP) from consultants to help its foray into the sector. The bank early this year said that it had received expression of interest from a few foreign players and domestic players to partner it in the life insurance foray.

Life insurance business in India is a highly crowded sector with the attendance of almost 23 players, including the market leader LIC. The first year premium collected by the life insurance firms saw a 23(%) per cent jump to Rs 1,03,875 crore during the April-February 2011 period against Rs 83,889 crore in the corresponding period the previous year.

However, there has been an 8(%) per cent drop in the number of policies sold, to 3.91 crore for the period April-February 2011 against 4.26 crore sold in the corresponding period the previous year. This has largely been attributed to the uncertainty relating to Ulip sales and the subsequent imposition of stiff regulations.

Indian bank has a bancassurance division through which it sells life insurance, non-life insurance and mutual fund products. “However the true potential for sale of life insurance products has not been fully exploited. With a view to participate in the growth of the life insurance industry, the bank would like to rope in a suitable partner for undertaking this business,” the bank said, in its tender notice.

Indian Bank’s bancassurance pact with HDFC Standard Life Insurance comes to an end by this month while its non-life bancassurance pact with United India Insurance would continue according to company officials.

New Plan by Max New York Life Insurance

In line with the recent wave of insurance plan launches, Max New York Life has introduced a new Ulip (unit-linked insurance plan) – Flexi Fortune – in the market.

Premium Paying Term:

The limited pay plan offers three choices in terms of premium paying tenure – one can opt for either a 5-pay-10-year term, 10-pay-15-year-term or 15-pay-20-year term. In easy words, what this means is that you can choose to pay premiums for 5 years while the policy continues till 10 years (in the first option).

Protection Cover:

The sum assured (or the protection cover) will, depending on your option and age, range from 10 to 30 times your annual premium. There is also a provision to increase the sum assured by 10(%) per cent every year, but additional mortality charges as applicable will be levied.

Systematic Transfer Plan:

Under this option, which is available only to those who choose the annual payment mode, your annual premium will, after deduction of premium allocation charges, be initially directed to the Secure plus Fund. Subsequently, on each monthly anniversary, 1/12th of the initial units purchased (in the Secure Fund) will be switched to the Growth Super Fund. However, this shifting will not be considered as a switch.

Charges:

The premium allocation charge works out to 5(%) per cent in the 1st year and 4(%) per cent in the subsequent years. Policy administration charges in the first amount to Rs 960 for a 10-year policy and Rs 600 for policies with tenures of 15 and 20 years. Second year onwards, this charge will go up by 5(%) per cent per annum, compounded.

Other Features:

The policy also offers two riders, namely personal accident and dreaded disease benefits. Minimum age of entry for the policyholder under this Ulip is 7 years, while the maximum is 50 years. Under the 5-pay-10-yearterm option, the minimum premium payable is Rs 50,000. In case of the 10-pay and 15-pay variants, the minimum premium under the annual mode is Rs 24,000. The policy places an upper limit of Rs 1 lakh for all premium payment modes.


Upside:

The feature where the sum assured goes up every year and systematic transfer plan that ensures restricted investing while reducing the risks by spreading the investment over a period of year.

Downside:

High policy administration charges - Rs 600-960 in the first year, depending on the premium paying term. More importantly, this fee will increase at the rate of 5(%) per cent every year.

HDFC Life’s ProGrowth Flexi | Ulip

The life insurance company, HDFC Life has launched ProGrowth Flexi - a Unit Linked Insurance Plan (ULIP) with minimum monthly premium of Rs 2500!
What HDFC has to say about its new product?
"A highly affordable product, HDFC SL ProGrowth Flexi comes with 30-day Free Look-in, flexible premium payment options, five investment funds, and the flexibility to change premium paying term."
To quote:
Amitabh Chaudhry, MD and CEO, HDFC Life –
“The product offers several flexibilities to customers that can be chosen based on their needs and appetite. Apart from the normal life cover, HDFC SL ProGrowth Flexi also provides extra life cover with accidental death benefits option.”

Premium payment:
• Yearly,
• Half-yearly and
• Monthly.
Investment funds:
1. Short Term Fund,
2. Income Fund,
3. Balance Fund,
4. Blue Chip Fund, and
5. Opportunities Fund.

How to avoid Insurance traps?

A new year means new resolutions. Regularly exercising and eating healthy is important for good health. But remember financial wisdom is equally important to keep your money intact and growing. It is also time for drawing up plans for tax investments as well as regular savings so here are some tips to get you started.

• Don’t invest in Ulips for only 5 years
It can be difficult to lock in money for long so if you expect you might need money in 1-3years from now, Ulips is not meant for you. You should look at this investment product only if you leave your money untouched for be-yond five years. A good time horizon would be around 5- 30 years.

To better understand this let us take an instance. If you invest Rs 1,00,000 in a Ulip for 30 years, the first year return will be negative at around 80,000. This is because the investment amount itself shrinks to Rs 75,000 after accounting for charges such as mortality, policy, allocation and fund management.

However, the investor breaks even after the fourth year and doubles the investment in 30 years. Even if the investor locks in for 15 years, he earns Rs 20.5 lakh if he has invested Rs 15 lakh. Ulips are designed in a way that they attract maximum front loading in the first 3-4 years of the policy. So, stay long to reap maximum benefits.

• Try not to take home loan insurance
Everyone would love a home of their own. It has become easier to own one with help of a home loan. But one should always remember that until you pay off the loan it doesn’t become your house in the true sense. The aspiration to own a house comes with a heavy price tag and a huge liability. Hence, you have to cover the liability so that your family doesn’t have to shoulder the burden of EMIs if something happens to you during the tenure of the loan.

Although the home loan insurance policy works similar to a term life insurance policy, term cover is the cheapest option. The risk cover/ sum assured will be equally to the outstanding loan amount at any point of time. But home loan insurance works on a reducing balance principle. As the outstanding loan amount reduces, the size of the cover also decreases.

The biggest advantage of a term plan is that the sum assured remains constant in a term plan over a period of time whereas in a home cover, it is a declining cover.

Ulips | Regulatory changes

In India, minority are insured; out of which about 50% people buy insurance for the income-tax remission on insurance premiums in the annual tax statement and the exemption of maturity value of insurance policies from tax
Unit-linked insurance plans (Ulips) have gained enormous popularity in life insurance segment in the current decade. According to statistics, the total new business premium generated from Ulip sales for the year ended March 2009 was Rs447 billion, or 55% of total new business, as per reports of the Insurance Regulatory and Development Authority (Irda). This has grown to about Rs60, 000 crore in the latest year. Private life companies generate over 90% of their business from single and regular premium Ulips.
Irda has brought vast changes concerning Ulips since June’10 forcing life insurance companies to completely rework their Ulip strategies. Since September’10, Insurance companies have been required to re-launch their Ulips.
Reasons for regulatory changes
Three main reasons for application of several restrictions on Ulips:
1. Due to the tax benefits discussed above customers have bought Ulips as short-term investment without serious intention to continue the policy until the final maturity date.
According to Irda, the lapse rate on Ulips was 26% in FY06 (which continued to increase), and the 13-month persistency level of Ulips has significantly trailed the traditional plans. The low level of life cover embedded in Ulips and the ease of exit had contributed to an unhealthy growth in lapsation.
2. The regulator considered that the low persistency has been encouraged by the insurers because they gained from surrender charges, which have been as high as 70-90%. Thus the “profits” earned by shareholders from the surrender charges have fuelled aggressive distribution of Ulips, forming a vicious circle.
3. Ulip distributors have not made honest effort to develop a long-term relationship with customers or make a needs-based analysis of their insurance needs. This has not made customers recognize that insurance policy is an instrument of long-term protection and growth.
In August’09, the securities market regulator issued a directive requiring asset management companies not to deduct any distribution and other charges from the investment amount of customers on mutual fund schemes with a view to encouraging retail participation. This “no entry load structure” has led to a drastic reduction in the commission earning of mutual fund distributors, thus these agents promoted sale of Ulips which fetched attractive commission.

Guaranteed returns only for traditional

Returns on NAV-guaranteed plans are higher than debt products

Last week, Pankaj Ramnath got a call from an insurance executive offering him a highest net asset value (NAV)-guaranteed unit-linked insurance plan (Ulip). Given the volatility in the equity markets, Ramnath felt a guaranteed plan was the perfect investment option.

Ramnath had various options to choose from. Birla Sun Life Insurance has launched Platinum Advantage Plan; ICICI Prudential has Pinnacle II; HDFC Standard Life Insurance has Crest, and the latest offering is from ING Vysya Life Insurance — Market Shield.
Investors expect to get returns based on the highest NAV in these funds. Suppose the NAV in the first, second and third year is 20, 30 and 40, respectively, the company will offer returns at 40 per cent even if the equity markets undergo a correction thereafter.
AT A GLANCE
Majority investments made in debt instruments, restricting returns
Suitable for conservative investors, uncomfortable with volatility of equity markets
An additional charge of 0.1-0.5% levied for guaranteed returns
Mostly returns given based on highest NAV only if the person stays until maturity
In most plans, nominee receives either sum assured or fund value, in case of policyholder’s death
Ramnath’s financial advisor, however, ruled against his investing in the product. Reason: the returns from such products are slightly higher than debt products or at best comparable to balanced funds. “Guaranteed return products are for investors who have a conservative approach and do not mind sacrificing the upside in lieu of downside protection,” says Rahul Aggarwal, CEO, Optima Insurance.

Like Ramnath, many investors think that in NAV-guaranteed funds, the insurance company will invest money just like any other Ulip (say 100 per cent in equities) and give back returns based on the highest NAV it achieves during the policy tenure.
In reality, NAV-guaranteed plans are not pure equity products such as other Ulips, which use different funds for wealth creation. To give the returns based on the highest NAV; these funds use an investing strategy where the majority of investments are in debt, and a minority portion in equity. “Fund managers of such plans have a free mandate and can move the entire portion of the fund to debt instruments at any given point of time, bringing down the overall return of the fund.”
Insurance companies keep increasing the debt allocation to lock the highest NAV. In the last few years, usually seventh to tenth year, the entire allocation is debt. A lower equity allocation restricts their returns.
In the last six months, Tata AIG’s Ulip — Tata AIG Individual Life Equity fund — gave 14.9 per cent returns, while its NAV-guaranteed fund, Tata Apex Pension 10-year Return Lock-in Fund, has given 11.1 per cent returns.

Charges for these products are the same as the other Ulips, after the regulatory changes, except that some companies levy an additional charge for providing the guarantee. This annual charge can vary between 0.1 per cent and 0.5 per cent (ING Market Shield) each year.
Except for ING’s Market Shield, most products give returns based on the highest NAV only if the person stays until maturity. If the policyholder exits midway, he/she would get the prevailing returns based on the prevailing NAV.

Most insurance companies had this product even before the Insurance Regulatory and Development Authority, or Irda, changed the structure and charges on all Ulips. In many of the earlier products, if the policyholder passed away, the nominee would get either the fund value or the sum assured depending on which of the two was higher. This feature exists in the new products, as well. Out of the products mentioned earlier, only ICICI Pru Pinnacle II provides sum assured and fund value, if the policyholder passes away.

The structure of this product category allows the fund to protect the capital, while capturing the small upside in the equity market. Someone looking for market-linked returns can look at the regular Ulip policy.

Life cover vs home loan protection

There is the good sales pitch. And there is the bad sales pitch. And between them is the not- so-bad sales pitch. Before you start scratching your head on what we mean, allow us to clarify. When an insurance agent asks you to invest in a unit linked insurance plan (Ulip), promising that your money will triple in 5 years, that’s the bad sales pitch. The money may or may not triple in 5 years. There are no guarantees.

When a financial planner asks you to buy a term insurance to insure your life, that’s the good sales pitch. In case something was to happen to you, your family will be financially secure. In between these lies the not-so-bad sales pitch, which you might just knowledge while applying for a home loan to fund your dream home.

The marketing manager at the bank/housing finance company (HFC) will try to sell you an insurance policy along with the home loan. Now, this is the not-so-bad sales pitch. The manager will tell you that if you buy this insurance policy, known as the home loan protection plan (HLPP), along with the home loan, then in case of your unforeseen demise, the insurance company will pay the bank the principal amount of the remaining portion of your home loan. This, in turn, means that your family can continue living in the dream house.

New ULIP launched by Reliance Life

Anil Ambani Group Company Reliance Life Insurance launched a unit-linked insurance plan that will provide policyholders the advantage of regular savings with improved protection and market-linked returns.

The new unit-linked plan (Ulip), Reliance Life Insurance Classic Plan, would offer protection to policyholders in the age group of 7-65 years.

"The unique plan of Reliance Life Insurance Classic Plan is that it offers flexibility and triple benefit of savings, insurance and investment - all in one single plan," Reliance Life said in a statement.

The plan also offers liquidity through part withdrawals and loans, top-up payment option and rider benefits to increase protection cover, it added.

"The new Ulip offers multiple benefits and protection - from helping policyholders plan their finances wisely at different stages of life, to providing risk cover on loss of life," Reliance Life Executive Director and President Malay Ghosh said.

Under the plan, the recipient would get double the base sum assured plus total fund value in the event of accidental death, the statement added.

The plan is available under two minimum payment options - Regular option and the Single Premium option.

Under the Regular Option, the customers would have to pay Rs 20,000 annually -- which can also be paid in monthly, quarterly and half yearly options.

For the Single Premium option, customers will have to pay a minimum of Rs 50,000 only once at the beginning during the 15-year policy tenure.

"The flexibility offered to policyholders by the company allows liquidity through partial withdrawals after 5th policy anniversary, loan after the completion of 2nd policy year and top-up option to increase regular savings," Ghosh added.

This is the second Ulip scheme launched by Reliance Life after the insurance regulator Insurance Regulatory and Development Authority came out with its revised strategy on Ulips a few months ago.

In October, the company had launched the Highest NAV advantage Ulip plan, which offers guarantee on maturity with the highest NAV per unit achieved throughout the entire 15 years policy term.