As a product category unit-linked insurance plans or Ulips have the dubious distinction of having the longest teething troubles. The most recent regulatory changes regarding Ulips were notified in July 2010 and new policies got launched with approval from September 2010. Ulip is an investment product with an insurance component built into it and this freedom to choose investments coupled with an insurance cover sounded irresistible to customers, who assumed they got the best of both the worlds. The life insurance industry has grown about eight-fold in the past decade, largely on the back of this class of insurance, which was launched in 2001. In 2009-10, Ulips alone contributed an estimated Rs 1.1 trillion worth of premium.
The charm of Ulips was more than the perceived convenience this product offered to policyholders. The commissions loaded into this product were such that it favoured agents who sold these plans. The high front-end loaded commissions meant that agents sold these policies irrespective of the type of client and their needs, fuelling rampant mis-selling. What’s more, agents actively encouraged policyholders to churn, adding further to the policyholders’ losses. It was on the back of these loopholes that in July 2010 Irda tweaked Ulip charges in such a way that insurers were compelled to do away with their age-old practice of paying high upfront commissions to agents.
Effective September 1, 2010, a new set of rules apply to Ulips that straighten out many of the kinks, focusing on protection and long-term investing into these products. The change in the new Ulip policies focuses on death benefit, charges, guarantees and caps on charges. All of these were introduced to protect the investors from being over-charged for a product that was difficult to comprehend. Lower agent commissions mean higher allocation of premium towards equities and better prospects of returns.
But do these changes and new features make them consumer friendly? The impact of the changes depends on the type of policies-type 1, type 2 and pensions plans from insurers. The results are not as straight forward and simple as one would expect them to be. For instance, the new Ulip is a better product and works over the long-term, but issues of benchmarking and disclosures are still left. The type 1 Ulips continue to provide the higher of the sum assured or the fund value as death benefit. If you do get into these plans, get early on to them in life and opt for the growth version with high exposure to equities, lowering it as you approach the end of the policy’s tenure.
The type 2 Ulips provide both sum assured and the fund value as death benefit. With the increase in the mandatory life coverage amount, this double benefit Ulip category becomes even more attractive since it does a better bundling of life cover and investment. With caps in cost and charges these are the best variants that one can expect to stay invested in. Likewise, the pension plans come with a 4.5 per cent guaranteed return on maturity, which is interesting, but may fall short of meeting your retirement income needs. These can be at best your baseline retirement plan and not the first choice retirement plan.
Like all seemingly good things, the new Ulips too come with their share of issues that have been skirted. Take for instance the mortality rate. These are outside the Irda’s proposed cost cap and have been hiked by many companies. Several policies have started offering the limited premium payment option for five years, circumventing the long-term need that these products are meant to serve. There is also an entry barrier in the form of a high premium which is as high as Rs 50,000. Further, guarantees on NAV-based products, apart from the highest NAV, are not clear and transparent.
But the biggest shortcoming of Ulips continues to be their inflexibility. The investment component of the policy cannot be invested in the best-performing fund; it has to be invested in one of the funds that your insurer offers. And though the new rules are targeted to benefit policyholders, reduce the first-year agent commission, and help in reducing mis-selling, going by past history, Ulips are not the best of products if investment is your key objective. If you are looking for protection, you will be better off with term plans that address protection needs. Despite all the fanfare, the new Ulips are at best a compromise that one should examine carefully before buying.
Compared to the old, the new Ulips are better. But there is still a lot that goes against it
Old: For regular premium policy, 0.5 X term of the policy X annualised premium OR 5 X annualised premium, whichever is higher
New: If you are below 45 years, 10 times the annualised premium, OR (0.5 policy term annualised premium), whichever is higher. If you are above 45 years, seven times the annualised premium, or (0.25 policy term annualised premium), whichever is higher
Impact: Ensures higher death benefits
Old: Front loaded
New: Evenly spread during the lock-in
Impact: Will ensure higher allocation of premium towards investment. Agent commission will be minimised
CAP ON CHARGE
Old: 3% reduction in yield if term less than 10 years; 2.25% for term over 10 years applicable only on maturity
New: Maturity caps are same. During the term of the policy, cap on charges applies beginning 4% at the end of the 5th year and 2.25% after 15 years
Impact: Higher returns will be ensured
CAP ON SURRENDER CHARGES
Old: No Caps
New: Maximum Rs6,000 reducing every year. Nil from fifth year onwards
Impact: More moneyback
Old: On surrender, the policy returns the fund value on payment of premium for certain number of years
New: On surrender, only a maximum of one-third of the surrender value can be had as lump sum. The remaining must be used to purchase an annuity
Impact: Will encourage continuing with long-term products
Old: No guarantee
New: On maturity, a minimum 4.5% guaranteed, which will be declared by Irda from time to time
Impact: Will ensure a minimum guaranteed benefit on accumulating money for the long-term