ULPs have become more consumer-friendly. But do you really need one?
New policyholders in universal life policies (ULPs) have a reason to smile. On Tuesday, the Insurance Regulatory and Development Authority (Irda) introduced some sweeping measures, which included reducing the cost structure and fixing a minimum sum assured. These moves are likely to make these products more consumer-friendly.
However, experts are still unsure if these products match up with other products in the same genre such as the Public Provident Fund (PPF), long-term fixed deposits, etc. “These policies would invest in secure papers from the government and corporates. You can compare these to traditional investments such as PPF and the National Savings Certificate. None have such high brokerage or charges,” says Gaurav Mashruwala, a certified financial planner.
The reason to reform ULPs was no different from that for unit-linked insurance plans (Ulips). Irda wanted to curb mis-selling and so reduced the front-loading of products.
The biggest change made in the product structure was increasing the sum assured similar to Ulips. All new products that hit the market from here on will have a sum assured equal to at least 10 times the annual premium. Earlier, some insurers were providing a sum assured of 7.5 times.
Front-loading the product was a major issue. Insurers were charging up to 20-25 per cent commission in the first year. In addition, there were expenses for managing the scheme, etc.
Irda’s recent guidelines clearly lay out the charges, including the commission and expenses. Insurers cannot charge more than 27.5 per cent in the first year, followed by 7.5 per cent in the second and third years, and five per cent in the subsequent years.
Many feel the charges are still on the higher side. But compared to the earlier practices, this move is significant. Reliance Life Insurance’s Traditional Super InvestAssure Plan had a premium allocation charge (PAC) of 80 per cent in the first year, according to the product brochure. This is only one of the charges. The company will levy other deductions such as policy administration charge. The company’s savings-cum-protection plan, Traditional Investment Insurance, levied a 30 per cent PAC.
Irda has unified the surrender charges with a mandatory three-year lock-in. If the policyholder decides to surrender the plan in the fourth or fifth year, he/she will get 98 per cent of the fund value in his/her account (this product has an account-like bank account or fixed deposit, and not a fund). After the fifth year, the insurer will need to pay the entire amount.
Previously, products from Reliance Life Insurance and Aviva Life Insurance had a two-year lock-in. The surrender charge was also high. For example, Max New York Life Insurance levied a surrender charge of 90 per cent of the first year premium, if the policyholder surrenders the policy in the second year. For the third year, it was 80 per cent of the first annual premium. Aviva charged 20 per cent of the balance in policy account, if the insured surrendered the policy within five years.
However, there are still risk-averse investors, who want liquidity and double tax benefit (deductions during investment and no tax on withdrawal) that insurance offers. Such people opt for traditional life insurance policy after fulfilling their PPF limit.
“ULPs offer flexibility to such investors. A person can increase or decrease the sum assured and investments as per his financial condition,” said Vinay Taluja, executive vice-president and product head, Bajaj Capital. He believes the new guidelines have made the product better though they cannot be benchmarked against the structure globally followed, where the sum assured is 200 times and at a low cost.
Conservative investors can also cheer, as Irda has made it mandatory for companies to give a minimum guarantee on the product. However, the regulator has classified the product structure in two categories, and your returns would differ depending on the product structure a life insurance company chooses to design for the product.
The first one is called non-participating policies, where the policyholders do not get benefits such as profit-sharing with the life insurance company, the insurers will need to declare a guaranteed interest rate initially, which will continue for the entire policy term. There can be an additional investment return at periodic intervals.
| THEN AND NOW | ||
| Features | Earlier | In future |
| Classification | Called Universal Life Policies Insurance Products | Called Variable |
| Policy term | Minimum 10-year policy | Minimum 5 years |
| Sum assured | Sum assured was variable. Lowest = 7.5 times of premium | At least 10 times of annual premium |
| Death benefit | Either the sum assured or account balance, which ever was higher | Both sum assured and balance have to be paid |
| Partial withdrawal | Allowed | Not allowed/Loans up to 60 per cent will be allowed |
| Expenses | Some charged 80 per cent of annual premium as PAC in the first year | First year charges capped at 27.5 per cent, 7 per cent in 2nd and 3rd years, 5per cent subsequently |
| Riders | Allowed | Not allowed |
| If insured discontinues premiums | Companies would charge the policy account for expenses | Companies cannot charge any expense. Life cover ceases |
| Lock-in | Most offered a 2-year | Compulsory 3-year |
| Top up | Maximum offered was 50 per cent of annual premium | Can be as high as the annual premium |
| Flexibility | Few policies allowed insured to change sum assured | All policies will need to give option of changing sum assured annually |
The other one is participating policy structure, where the insurance company needs to provide a minimum guarantee on the product, say 3.5 per cent each year. Later, the companies would declare bonus at the end of every financial year depending on the performance of their investments.
Insurance expert say non-participating policies will fetch lower returns, as the insurance companies will need to adopt a conservative investment strategy to fulfil the guarantee. For example, the companies will forfeit corporate bonds that fetch higher returns and invest only in government securities. In this structure, the insurance company needs to set aside more capital for the guarantee as well.
