The dramatic fall in equity prices following the September 11 terrorist attacks in the US has seen new life insurance companies rushing to capitalise on the low equity values. They are introducing a unit-linked insurance cover, which essentially allows the policyholder to bear a part of the risk in returns based on the investment choice of instruments. Given the current level of the market, most players do not expect further drops from the present level.
ICICI Prudential Life Insurance Company is hitting the market on Monday with its initial public offering of a single-premium unit-linked product -- ICICI Pru LifeLink. OM Kotak Mahindra Life Insurance has applied to the Insurance Regulatory and Development Authority (Irda) to offer a unit-linked endowment plan. Similar plans of other players are also on the drawing board stage.
Actuaries are structuring the guarantees in these covers based on the investment return, cost and mortality rates.
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"The unit-linked plan is designed for people who have the appetite and inclination for market-linked returns but do not want the market volatility to adversely affect the family in the unfortunate event of death," said ICICI Prudential chief marketing officer Saugato Gupta.
Private sector life players are providing guarantees to policyholders, should market conditions not be favourable at the time the plan matures. "We allow policy holders and their families to enjoy the upsides of the market, while we protect the family against the downsides," Gupta said.
ICICI Pru LifeLink has given an assurance to pay 1.5 times the investment (premium) should the net asset value of the cover taken, work out to be less when the policy holder dies. "This provides death benefit security to the family," Gupta said. This benefit will not apply should the actual policy holder choose to exit from the cover after the one-year lock-in period. The insurance cover also ceases when the individual attains the age of 70. However, he is allowed to continue his investment in the programme. OM Kotak is also planning to offer guarantees on its endowment policy.
Structured more or less on the lines of a mutual fund cover, ICICI Pru LifeLink with its three plans - growth, balance and debt -- allows a customer to invest up to 100 per cent in equities under its growth plan. At the same time, the individual gets a tax exemption of up to Rs 60,000 under section 88 of the Income Tax Act.
In the case of mutual funds, the exemption is up to Rs 20,000 only. In addition at the time of exit from the cover, policy holders can also get exemption from capital gains tax under section 10(10)D. There is a 2.5 per cent entry load and an annual administrative charge of one per cent. There is no exit load.
In the last couple of months, there has been a convergence among products, whether it is insurance or any other financial product, said Gupta. "Considering the good returns investment in life insurance has given at the rate of 9.5 to 10 per cent, it makes sense to invest in life product, which offers a holistic product considering the returns and the tax exemptions offered. Life companies have made good returns of 9.5 to 10 per cent at least," he added.
The cover will be sold as a mutual fund product, and not as a life policy. The target group should be in the age bracket of 30 to 40 years, and not retirees, said Gupta. Initially ICICI Prudential will start with a conservative investment policy, and does not wish to invest too much in equity.
The Life Insurance Corporation of India (LIC) was the first to introduce a unit-linked plan, Bima Plus, which has not met expectations. This said the new players, is on account of the high entry load, and costing. Moreover, as it is a single premium policy, and sales commissions are low, agents have not been pushing the product either. Commissions on most single premium products are around two per cent.
Birla SunLife, the first in the private sector to introduce the product, says most customers are opting for low and medium risks. Preference has been geared towards Birla Sunlife's Protector and Builder plans, which in effect correspond to a debt and balanced growth fund in terms of investment strategy. Incidentally, the maximum investment in equity for Birla SunLife's Enhancer is capped at 35 per cent. "This is in keeping with the Irda regulations governing investments by life players," said the company associate director business development Anjana Grewal.
The investment strategy approved by the Irda in the growth plan of ICICI Pru LifeLink on the other hand, allows a cap of 90 per cent on investment in equity stocks. However, an individual can take up to 100 per cent exposure in equity depending upon his age and risk-taking ability, said Gupta.
ICICI Prudential IPO opens from October 22 through to November 12, offers the unit-linked plan at par (Rs 10). Subsequent to which, exit and entry will be based on the net asset value of the fund with weekly declarations every Tuesday and Fridays.