Life insurers fear ULIP sales halt in Sept

According to media reports, many private life insurers fear sales may come to a standstill in early September, as they do not yet have in place products that are compliant with new guidelines for unit-linked insurance plans (ULIPs) that come into force next month. At the same time, marketing by some unscrupulous agents has reached fever pitch as they push existing high commission policies, which will become non-compliant from next month, by positioning them as a limited period offer

What has changed with ULIPs ?

Unit-linked insurance products or ULIPs are perhaps the most widely discussed and written about financial products in recent times, and not all for the right reasons. First, there was the battle over who would regulate them, and then came a series of regulatory changes to reform the product.

All about the ULIPs - new charges

Unit-linked insurance products or ULIPs are perhaps the most widely discussed and written about financial products in recent times, and not all for the right reasons. First, there was the battle over who would regulate them, and then came a series of regulatory changes to reform the product.

ULIP Charges that you should be aware of

Take a good old equity fund stripped of the 2.25 per cent charged to investors, add a insurance component and layer it with five or six charges with esoteric titles such as premium allocation charges, policy administration charges, mortality charge and you have the hybrid product that is called a Unit Linked Insurance Plan.

ULIPs marketed by insurance companies are quite a hit with investors planning for almost anything – ranging from their child's education to pensions. Yet in recent times the plans have been in the eye of a storm. One of accusations against ULIPs is the bevy of charges they levy on investors.

Here's a rundown of the charges you can expect if you buy an Unit Linked Insurance Plan. Understand them before you take the plunge.

Premium allocation charges – This is the biggest expense component for investors buying ULIPs. It tends to range between 10 per cent and 100 per cent of the premium amount invested for the first year.

Premium allocation charges may be spread out in differing proportions for different ULIPs.

Some insurers levy a high charge upfront and taper it down from the second year. Others have a uniform charge across several years. This charge usually ceases in the fifth year of holding with any premium top-up seeing a two per cent deduction.

The controversial and sizable agent commission, which the Insurance Regulatory and Development Authority (IRDA) has recently asked insurance companies to disclose, usually comes out of the Premium Allocation Charge.

PAC is deducted from the sum you invest before buying units in your account.

Policy administration charge – A sizable component of the fee paid by investors, this charge is levied throughout the tenure of holding the policy and in many cases begins to increase annually from the third or fifth year.

This charge occurs in a percentage of premium and fixed rate forms. The magnitude of the charge per annum ranges from 3 per cent to 8 per cent of the premium paid. This charge is usually deducted from your holdings, by reducing the unit balance to your credit.

The investor really needs to watch for this number, as it is often displayed on a monthly basis on brochures. When you annualise it, a small but sizable bite is taken out of your capital and returns.

Fund management charge – In addition to charging you for allocating and administering your funds, insurers charge between 0.95 per cent and 1.35 per cent of your fund value (the prevailing worth of your portfolio) for managing it.

Mortality charge – Mortality charge is what the insurer charges you for providing the insurance cover that is bundled into a ULIP. This amount is charged per thousand rupees of sum assured – what the insurance company pays your kin in the event of your death.

Mortality charges usually rise with age with additional amounts sometimes being charged for unhealthy lifestyle choices such as for smoking.

The amount could range from Rs 150 a year for a lakh of sum assured for a 20-year-old to Rs 700 a lakh for a 50-year-old. The charge varies between individuals and is determined by actuaries.

Surrender charges – Surrender charges are usually applied only if you choose to exit your ULIP prematurely, or discontinue premium payments ahead of term.

This component could potentially turn your Unit Linked Insurance Plan into an expensive, if not a loss-making, affair.

The magnitude varies from 10-40 per cent of first year policy premium for exiting within the initial two to five years.

This charge again varies with schemes and insurers.

Other possible charges – Switching between plans, partially withdrawing premiums, reinstating a lapsed policy are other investor actions that could entail charges. While they may pale in comparison to the aforementioned charges, being aware of such fees prepares the holder for an eventuality.

For example, a rider premium charge, which is an additional charge not found in all policies, could enable the holder to amend the terms of the policy in the event of serious illness or disability.

While the charges on ULIPs may appear daunting, remember that all charges have to fit into the cap imposed by the IRDA.

With effect from January, the Insurance Regulatory and Development Authority has moved to cap the expenses related to holding ULIPs for 10 years at 3 per cent per annum and beyond that at 2.25 per cent per annum.

The mortality premium and rider premium are excluded from this cap.

However, these caps apply only to investors who stay put with the fund for a decade. A shorter holding period may yield below-par returns, by virtue of the expenses loaded on the investors in Unit Linked Insurance Plans during the early years.

via BL

ULIPs - the way forward

The dispute between regulators over unit linked insurance plans (ULIPs) marketed by insurance companies has left many investors confused. Here's an FAQ to address some of the doubts that investors may have:

What is the status of my existing ULIP after the SEBI ban? Should I continue to pay my renewal premium? Will it be accepted?

With both the regulators agreeing to jointly seek a binding legal mandate from a Court in this matter, there is as of now no change in the status of your ULIP.

If you have taken the ULIP to meet any of your financial goals, you should not stop paying the annual premium. The insurance companies will continue to accept the renewal premium.

SEBI's clarification this week also exempts ULIPs existing as on April 9, 2010, from the earlier ban.

Should I surrender my ULIP as there seems to be some regulatory problem?

The current issue is not about ULIPs, but about who will regulate them. Hence, you need not surrender the policy, especially if it is less than five years old.

ULIPs typically collect high surrender charges in the first five years. The surrender charges could be as high as 25 per cent if you have paid premium only for two years.

Apart from that, due to high initial upfront charges you may not even get what you have invested.

So don't make a hasty decision.

Will my money be safe if there is change in the regulator?

You need not worry about that. The issue of safety will arise only if the insurance company is going bankrupt.

In ULIPs, the money collected is mainly invested in equity and debt instruments based on the mandate of the policy. Your investments do carry market risk and can suffer if the portfolio of the fund does not perform. But as long as the equity and debt markets are functioning smoothly, a change in the regulator will not impact you.

I have paid premium for three years. Will I continue to get risk cover on my life if I stop paying premium?

Policyholders will be covered for life risk as long as your fund value is above the regular premium payable. If your fund value falls below this threshold due to adverse market conditions, then your policy will be closed and the proceeds will be paid to you, after deduction of surrender and other charges.

I have paid premium for two years. Is it possible for me to surrender the policy?

If you stop regular premium payments before three years have passed, your funds will be held in suspense, after deduction of surrender charges. The amount in the policy will be paid out to you only at the end of the third year.

Is it possible for me to convert my ULIP to a pure term insurance products?

It is not possible to convert your ULIP into another product. If you have decided to close the ULIP, with that proceeds you can buy a new term insurance policy.

Is investing in a ULIP a bad investment decision? If I pay premium for three years for a 10-year term, will it affect the overall return?

ULIPs are not a bad product per se. Insurance is a long-term product and the cost structures are designed in such a way that only investors who with the fund for 8-10 years will reap the benefits of the investment. Early exit is penalised through high charges.

If you bought a ULIP believing it to be a three-year product, then it will fail to reward you for the risk of blocking your money.

In a ULIP, more of your money goes to build your fund value only from the third year onwards. Therefore, only someone who keeps investing for 8-10 years may get an equity market return.

The major problem with an ULIP is that if the product underperforms the market for the initial years and if you try to exit, investors suffer a double whammy – low returns and high charges.

Should I invest in a ULIP today, given all this controversy?

First and foremost, it is to be understood that insurance are long- term product intended for, say, 10-15 years. We do not know how the current dispute on regulations will end. But it may alter the structure, costs and other features of products. Some changes may also be beneficial for investors.

Under the uncertain situation, it may be better to postpone the investment in new ULIPs and wait for clarity.

Tomorrow if the life insurance agent's commission is reduced, like mutual funds, and if he stops collecting the premium cheque and stops advising me, how should I handle the situation?

If that does happen, based on the service you require and the service rendered by the agent, you can negotiate and fix an advisory fee for him. You should also note that payments and reminders about renewal premium have become easier to deal with as several options are available.

To pay premia, you can opt for electronic clearance mode, credit card payment option, online payment or use the cheque-drop facility.

via BL

ULIPs vs Mutual Funds

Understanding ULIPS

When it comes to Ulips, it appears that there are no shades of grey: you either love them or hate them. To put it in black and white, the industry and potential purchasers love them, and most of the people who have them tend to hate them. Accusations of mis-selling and hard-selling are hurled at the industry. Most investors admit that they don't understand how it works, but they keep buying Ulips more than any other insurance product. Hence, all kinds of records are being broken: there is an unprecedented growth in the number of Ulips sold and in the collection of premiums. All of this serves to boost the cause of privatisation. This is why we decided to make Ulips the subject of the first Money Today Round Table, held in Mumbai last month.

Since a number of investors (existing and prospective) purchase Ulips without knowing much about them, we felt it was the job of a magazine like ours to give them more information. But what are the industry stakeholders insurance firms, distributors and advisers doing about it? Surprisingly, many of them, who participated in the discussion, admitted that there was rampant mis-selling. But in the same breath they added that the system had become corrupted and they were only the byproducts of the system . They felt that the consumers didn't wish to be (seriously) involved at the time that they bought a financial product.

When we prodded the experts, they admitted that agents push potential buyers to opt for Ulips instead of other insurance products that might suit the latter better. Even the product manufacturers were blamed for not being able to realise the opaqueness in the manner in which they operated. An additional complication arose since it is extremely difficult to compare different Ulip products. Many said that even the insurance regulator might be unable to solve the basic problems that the industry faces today.

As a part of the Round Table, we invited six industry representatives to brainstorm and discuss where the Ulips were headed, and the problems that confront the industry at present.

Insurers are biggest investor in stocks

Riding on the huge popularity of Unit Linked Insurance Products (ULIP), insurance industry emerged as the largest investor in the stock market during 2007-08 surpassing the foreign institutional investors , according to Life Insurance Council.

The council, in a briefing to the media in Mumbai on Thursday said the net investment by life insurance companies in the equity markets during 2007-08 was Rs 55,000 crore against an investment of Rs 53,400 crore by foreign institutional investors.

The investment by mutual funds in the same period was estimated at Rs 16,300 crore.

S B Mathur, secretary general of Life Insurance Council, an apex organisation of all life insurance companies in the country, said the investment by insurance industry in the stock market in the first four months of this financial year was about Rs 25,000 crore. During 2006-07, investment by insurance companies in equities was only Rs 20,000 rore.

U S Roy, managing director and CEO of SBI Life Insurance Company said it was for the first time that the investment by insurance companies in the stock market was higher than the foreign funds.

He said the large investment made by the industry has helped the market to stabilise. The volatility in the market could have been much more but for the large investment by the insurance companies, he said.

According to the Council, 80 percent of life insurance business during last financial year was received by way of ULIP.

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