Remember the guarantee return products offered by life insurers till last year? Many of these used to be linked to interest rates. The insurance regulator wasn't comfortable with these products and these had to be taken off the shelf as these were essentially low-return products. Soon, these will be categorised as index-linked insurance products (Ilips). The Insurance Regulatory and Development Authority (Irda) came out with the product provision paper on August 1.
Good news: This product will give guaranteed returns, depending on the index it is linked to. And, given it will be index-linked, it might not require to be managed, thus saving you the fund management cost (FMC). The Irda paper explains that every policy shall have a policy account, maintained separately (like your bank account), whose balance shall depict the accrual. The account shall be credited with premium accumulated in accordance with the minimum guaranteed regular additions, if any, stated at the outset. Policyholder’s account shall be in possession of funds to the extent of the guaranteed amounts as and when due.
“The guarantee will be provided only if the product is linked to safer indices like 10-year government bonds, the Reserve Bank of India’s benchmark rate or State Bank of India’s savings account rate. There is no restriction on the kind of indices these can be linked on. If the product is linked to Sensex or Nifty, it will not guarantee any benefit,” says the actuary of a life insurance company.
On the cost front, you can save on FMC, as against unit-linked insurance products (Ulips), Ilips will work like passive mutual fund schemes. For Ulips, FMC typically ranges between one per cent and 1.35 per cent. But, that might not lessen costs for you.
“The charges are not defined for this product, so far,” says Amitabh Chaudhry , managing director & chief executive officer of HDFC Life. The reason is that they will be decided on the way the product is designed, he says. Sample this: Insurer A links his product to a 10-year government bond and says your investment earns 10 per cent. The company could decide to pay you eight per cent and retain two per cent to meet its cost. At the same time, another company will decide to pay nine per cent and retain one per cent as its product will be linked to another index.
The regulator has suggested companies levy only mortality (risk cover) charges explicitly. Other charges, like on surrender and withdrawal will remain implicit throughout policy term. This makes Ilips look less transparent than traditional insurance products — endowment and moneyback plans. The charges levied by Ulips are clear now — premium allocation charges of up to 10 per cent and FMC and policy administration charges up to 0.50 per cent of the premium (many times in the later policy years).
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Similarly, you can’t rest your investment decision on the returns that will be offered by these products. The product allows the insurer to link it to an index, say interest rate, and auto-adjust it every month or quarter. This means if your friend earned six per cent last year, you might earn higher or lower this year, says the actuary. The products available till last year had to be refiled in case the index yield changed. Now, it will be revised automatically.
Says G N Agarwal, chief actuary of Future Generali Life Insurance, “We are not sure if this product will find investor interest, as it is more or less like Ulips. We are waiting for the final guidelines.”
Death benefits, lock-in period and surrender norms are similar to Ulips; only the cost structure is different. In comparison to Ulips, these products give more guarantee, as a result of which your returns will get capped, which would be higher for Ulips as these are stocks-linked. Ilips can be an option only once the final guidelines come. But, financial planners are already not favouring it. They stick to the thumbrule of keeping insurance and investment separate, as both individually will cost less and give higher benefits.