Only for the risk-disinclined

Despite Irda’s good moves, insurance policies should be bought for cover, and not for investment.
Those planning to buy unit-linked insurance plans (Ulips) might as well wait for some time. This is because products launched from September 1 will be quite different from the existing ones
This is a crucial phase where the regulator, the Insurance Regulatory and Development Authority (Irda), and insurers are exchanging notes to fine-tune the products. Since June 28, when the first round of guidelines came, more changes have been introduced. Last week, Irda issued another set of clarifications that would change things further.

GUIDELINES
• 4.5 per cent guaranteed return for Ulip pension plan on gross premium till March 2011
• After March 2011, returns will be 50 basis points above the average of reverse repo rate at each quarter-end in the 3-6
per cent range
• Difference between minimum and maximum distribution charges to not be more than 1.5 times
• From 5th year onwards, minimum difference to be given on completed year
• Life cover on top-up premium to be based at the age of payment and not at the entry age
Pension plans
Pension plans will certainly look better. But, only for the risk-averse who have more than Rs 70,000 to invest annually. With a guaranteed return of 4.5 per cent on Ulip pension plans on gross premiums, returns will be higher than the existing savings deposit rate of 3.5 per cent.
But this 4.5 per cent will only be paid till March 11, 2011. After that, the returns will be linked to the reverse repo rate. Policyholders will get 0.5 per cent more than the average reverse repo rate at the end of each quarter. The regulator has asked insurers to give in the range of three-six per cent on pension plans after March 2011.
Since policyholders cannot withdraw money in the interim, liquidity could be an issue. For liquidity seekers, it makes sense to look at fixed deposits. State Bank of India is offering 7.25 per cent on five to eight years and 7.5 per cent on eight to 10 years deposits.
Also, most people already have exposure to the higher paying employee provident fund (8.5 per cent annually) and the public provident fund (8 per cent annually). But returns from these two can get capped as one can invest only up to Rs 70,000 annually. For ones who wish to invest more than this, this option could be good.
Costs
The newly-inserted clause...“the maximum and the minimum charges shall not vary by more than 1.5 times” should come as a relief.
For instance, if one considers a policy that was charging a premium allocation charge (PAC) of 50-60 per cent in the first three years, earlier, the cost in the first year could have been 30 per cent in the first year, 20 in the second and 10 in the third.
Now, because of the formula, the charge will be over five years. So, one could see numbers like these: If an insurer is charging, say, eight per cent in the fifth year, he cannot charge more than 12 per cent in the first year. Accordingly, PAC will be between a 44 and 56 per cent, spread over five years.
Besides the formula and spread over five years, the difference between the net and gross premium has to be maintained – four per cent in the fifth year (for a 10-year policy), 3.75 per cent in the sixth year, and so on.
“The regulator has also clarified that the minimum returns prescribed starting from the 5th policy year will be given on completed years,” said an actuary of a life insurance company.
Where the policyholder could possibly lose out is top-up premiums. In new guidelines, Irda said top-up premiums would be used to purchase an additional cover and not invested entirely. But latest clarifications specify that policyholders will not be allowed to pay top-up premiums in the first five years. After that, top-up premiums will be used to purchase cover, but according to the existing age.
As a result, the mortality rate will come into play. If a person purchases a policy at the age of 30 and starts top-ups at 35, he will have to pay higher mortality fees.
“The new notifications remove all ambiguity. Manufacturers cannot interpret the guidelines in their own ways. Of course, if the policyholder has a very long-term perspective, he should look at insurance.
Otherwise, if you have a horizon less than five years, mutual funds, bank deposits and the likes suit you,” said P Nandagopal, managing director & CEO, IndiFirst Life.