Thursday, August 5, 2010


The Ulips were in the news for last six months over its control on market based returns. Two regulatory authorities i.e. IRDA and SEBI fought bitterly over its control. As predicated Finance Ministry stepped in and control was given to IRDA exclusively. But the revised guidelines on unit-linked insurance products (Ulips) by the Insurance Regulatory Development Authority (IRDA) made exit an easier affair only for those who remain invested for more than five years. This follows the regulator's decision to increase the minimum lock n from the current three years to five years, to encourage long term investment and stem the high rates of surrender. This is a good move. Why customers started leaving ULIPS with premature surrender? This was because the terms of the policy was not clearly stated that till fifth year it would not earn a decment return. Customer expected higher return on buying ULIPS and found there were negative growths for first few years due to heavy cost of acquiring. That peeved the customers and they choose to leave prematurely even with a loss of capital. This happened as the dealing of advisors was not transparent.

The Government and regulatory authority did realise the unhappiness of the general public on ULIP and wanted to remedy the situation. The recent action of IRDA is pragmatic and futuristic.

We have always been advocating in our column that customers of ULIP who want to exit between five and nine years would stand to benefit .Taking note of the surrender behaviour and with a view to smoothen cap on charges, IRDA has imposed limits on charges from the fifth anniversary of the policy. The maximum reduction in yield for a Ulip after five years shall not be more than 4%, IRDA said. ULIPS have become out and out a insurance product now and young people who keep invested for longer term would be benefited with insurance cover.

“Small regular premium (Ulips) policies may become unviable. A large proportion of people who were paying a premium of less than Rs 15,000 or so a year will suffer badly. Small-ticket policies of less than Rs 20,000 a year should have higher allowance to make them viable.

In July last year, the regulator had capped the charges on Ulips. It specified that the net reduction in yield for policies less than or equal to 10 years shall not be more than 3% at maturity. Ulip is a better long-term investment product and works well with a 7-year timeframe. "It (the new rules) would encourage investors to stay on for at least five years," according to experts of Insurance. This is true. Ulip is ideal for children marriage Planning or for children’s education fund. We had advised most of our readers not to surrender ULIP before seven years as that would mean loss . We forewarned our readers of ULIPS rather to maintain the plan once entered for longer time.

In a bid to eliminate high front ending of expenses, which are as high as 30%, the regulator has mandated that they should be evenly distributed during the lock in period. However, some experts are not happy as it would mean that investor would still have to shell out the same amount albeit over a longer period. But we feel while paying early the entire money the return in initial period get effected. It would be prudent to pay the cost in installments as higher amount available for investment may return higher amount initially .

.The most important Lacuna of ULIPS, we have always maintained, were lack of transparency.With more transparency coming in and disclosure of commission to be made mandatory , investors would be better informed now.. Ulip from now onward would be purely a product of insurance .From September this year it would cover life insurance automatically and it would be a powerful tool of Personal Finance hence forth. Instead of Mutual fund and term insurane combo ULIP would turn out to be a great product by itself. As on date it is not a great product but from September 2010 it has potential to be a product of importance.

Insurance sector regulator IRDA on EARLY JULY came out with a set of guidelines directing life insurers to offer unit-linked insurance plans (Ulips) at lower cost to buyers, while also providing higher life cover, though with a longer lock-in period.

While life insurance customers will benefit, the new rules could lead to a substantial cut in commission for insurance agents and force life insurance companies to drastically cut costs, leading to lower sales.

IRDA stated that insurers would be allowed to charge up to 4% on annual premium paid on Ulips for the first five years, and thereafter charges will be reduced during the tenure of the policy. For plans of 15 years and above, the charges will be restricted at 2.25% of annual premium.
These cuts in charges would make Ulips more attractive to buyers since they will have to pay lower charges for the same premium they paid earlier. In the long run, this will add to Ulip buyers’ funds. ‘‘Lower charges will benefit customers,’’ said GV Nageswara Rao, MD & CEO, IDBI Fortis Life Insurance. However, this could mean lower commission to agents which might affect Ulip sales, he added.


The insurance regulator has ordered life insurers to offer customers a guaranteed return of 4.5% per annum on pension and annuity plans as part of its new, tighter norms for the sector, a move that is expected to force companies to slash commissions to agents and invest more in government securities.

period. Insurance officials say a guaranteed interest rate would force them to have a predominantly debt-oriented portfolio, insulated from the high market volatility that accompanies investments in equities. Until now, over 30% of new business premium for life insurers have come from pension plans, a large part of which has been invested in equities. Insurance companies also fear that the new rules will adversely impact insurance distributors in the same way a Sebi ban on entry and exit loads hit mutual fund distributors.

Industry officials said the tighter norms on capping of expenses will have far-reaching consequences for the industry, as small regular premium policies will become unviable. It will especially hit a large proportion of policyholders paying premiums of less than Rs 15,000 or so a year. The new rules on commissions will hit distributors’ incomes.

“I hope we don’t land up in a situation where the product is very good but no one is willing to sell it,” said Kamesh Goyal, MD of Bajaj Allianz Life Insurance.


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