New breed in the insurance stable

Deepti Bhaskaran, Mint

With its cash cow, unit-linked insurance plans (Ulips), ceasing to be as lucrative as it used to be in view of the new guidelines by the regulator, the insurance industry has introduced a cross-breed in its stable—universal life plans (ULPs). These are a combination of Ulips and traditional plans—their structure is like that of Ulips, but they borrow their investment strategy from traditional plans.

Though a popular concept in the West, in India the genesis of ULPs can be largely attributed to the new regulations that have, for insurers, taken sheen off the Ulips. In fact, the focus is expected to shift completely towards traditional plans and ULPs.

The Insurance Regulatory and Development Authority (Irda) is already working on guidelines for ULPs. These are expected to be out in a couple of months. Says Irda chairman J. Hari Narayan: “ULPs resemble a Ulip in structure and, therefore, we don’t want investors to mistake it for Ulips. Also, since they resemble Ulips, there is a risk that ULPs will get tailored like Ulips as they are today. Therefore, we need to bring ULPs under a fresh set of regulations, which clearly specify charges and other disclosures.”

Even as the regulator is busy framing the guidelines, two insurers have already launched ULPs in the last one year; other insurers are likely to follow suit.

Like Ulips, ULPs clearly specify the charges and the manner in which they are deducted. But like traditional policies, they invest heavily in debt instruments.

At the most basic level, ULPs work like Ulips—you pay a premium and choose a sum assured, which is a multiple of the premium. A major portion of the premium you pay goes out in premium allocation charges and the remaining is invested. You pay more costs out of this investment fund, such as mortality and administration charges.

However, ULPs are different from Ulips in terms of investment strategy. Look at these like bank accounts. Since they invest in the market, Ulips have net asset values that can be monitored on a daily basis. So, at the end of each day, you would know whether your bank balance has gone up or down. ULPs, on the other hand, invest primarily in debt products and their return is dependant on the rate the insurer declares periodically. This means that your bank balance would change only when the insurer declares a new rate.

Manik Nangia, head (product management), Max New York Life Insurance Co. Ltd: “ULPs offer a choice to the consumer with a conservative risk appetite—the risk of return is on the company and the floor crediting rate is guaranteed. The framework is similar to Ulips in terms of transparency, but the underlying assets are bonds, just like in traditional plans.”

We assess the two ULPs that were launched after Ulips came under the regulatory scanner.

Features: You can opt for a sum assured up to 10 times the premium you pay. If the policyholder dies within the term, the beneficiary gets the sum assured and the company foots the remaining premiums. On maturity, the beneficiary gets this additional fund value.

Investment: The policy invests only in debt instruments, such as government securities and corporate bonds. Depending on the fund’s performance, the policy declares an interest rate every quarter, which gets added to your fund value and becomes guaranteed. The policy guarantees a minimum rate of 3.50% per annum. Besides, a loyalty bonus of 10% of the annual premium shall be added to the fund value in each of the last five years of the policy.

Charges: For premiums up to Rs50,000, the policy would deduct 30% in the first year and nothing thereafter. For higher premiums, the charges are nil. Additionally, the policy charges 0.125% of the sum assured from the fund value every month in the first three years of the policy. Subsequently, this charge would be limited to Rs150 per month.

Performance: This plan has been declaring a rate of 6.50% consistently for the last four quarters since inception, including the current one. However, your return will depend after the costs have been accounted for. On the minimum guarantee of 3.50%, the policy returns a net of 2.90% for a period of 20 years for a 30-year-old and 2.1% over 15 years.

Features: In this, the insurance cover is fixed at 7.5 times the premium you pay. This policy resembles a type 1 Ulip, which gives the higher of the sum assured or the fund value as death benefit.

Investment: Your money grows at the rate declared by the company every year. For FY11, the rate is 7.75%. Though this rate will keep changing every year, it can’t fall below the savings account rate offered by banks—currently 3.5%.

Charges: From the premium, 30% gets hacked as premium allocation charge in the first year. It gets reduced to 5%, thereafter. Apart from this, an account administration fee of 1.25% per annum will be deducted per month from the fund value. An administration fee of Rs40 per month will also be levied.

Performance: The charges in the policy drag your returns by about 1-2 percentage points, depending on your age and the term you choose.

The returns these policies declare are guaranteed, but future returns aren’t. Since the investment portfolio is skewed toward debt, the returns will be modest. If you factor in the high charges, it could come down further. For instance, in case of Max New York’s Secure Dreams, the cost is a percentage point, while for Reliance’s Traditional Investment Insurance, it reduces the return by 1-2 percentage points. You will have to factor in these charges before being won over by the rate of interest being declared.

Whether it makes sense for you will depend on your risk appetite but you need to keep in mind that ULPs, in their current form, do not give you adequate insurance cover.

Says Anil Rego, founder and CEO, Right Horizons Pvt. Ltd, a financial planning firm: “Globally, ULPs are whole-life in nature but in India these are pitched between Ulips and traditional plans. ULPs are meant for investors who want low risk. However, it will make more sense for those who come in the higher tax bracket and are looking at fixed deposits (FDs). The tax inefficiency in FDs makes ULP a better option.”