Hard to understand and harder to get returns from,unit-linked insurance policies had gained a reputation for their high agent commissions and non-transparent nature. After Irda stepped in to cap Ulip charges from September,many insurers have started hardselling universal life policies (ULPs),offering much in terms of flexibility and little in terms of transparency. Not surprisingly,the insurance regulator is not amused. After capping the charges on Ulips from September 1,Irda is now planning to cap charges on ULPs.The regulator is worried that ULPs do not offer much clarity and is replacing Ulips in terms of new business. In fact,Irda chief J Hari Narayan recently told the media on the sidelines of an insurance seminar that these are new products and pose some challenges. We do not want too much play in universal life policies which are detrimental to customers. We will shortly come out with guidelines for ULPs, he underlined. Though Irda has not revealed the kind of regulation it has in its mind,analysts say the regulator may put a cap on reduction in yields on the product in the same way as it had done for Ulips,where the difference between the gross yield and net yield have been capped at 3%. So,what are ULPs and how do they work? It is a life insurance policy with features of both traditional insurance,where there is a separate identification of mortality and expense charges as well as the amount of credited interest on the account value. The policy offers flexibility to an investor to change the premium amount,tenure and even the sum assured during the policy period. The timing of premium payments may be fixed or variable and is not related to the timing of the deduction of insurance and expense charges. If your income increases during a particular period,you can increase the premium and vice-versa. Again,an investor has the option of changing the sum assured depending on his or the family's current insurance requirements. Moreover,the investor can also change the tenure of the plan. The investment process remains same like Ulips. After deducting the mortality charges,the premium amount of the investor is put in bonds and equities. But the biggest difference is that in ULPs,there is no unitisation of funds,which means the fund value is not declared as in traditional plans. Also,one wouldnt know where the money has been invested and what return it has obtained. Currently,private insurers like Max New York Life Insurance,Reliance Life Insurance and Bharti Axa Life Insurance are offering the product. Theoretically,a ULP is similar to a term policy,but with more flexibility added. Even if you stop paying the premium,the policy will not lapse and unlike Ulips,there are no fund house charges being levied on the investor. Also in lines of a term policy,ULPs will give bonus as declared by the insurance company for every time frame. The policy does not get automatically cancelled even if the customer fails to pay the premiums and the condition is that the premiums paid till date should be sufficient enough to meet the policy requirements till then. However,on the flip side,an investor does not know where the money is being invested. An agent's commission can go up to 30% of the total premium in the first year itself. As per current guidelines,commissions on a single premium are capped at 2%,on pension products,they are capped at 7.5% and on any other insurance product they can go up to 40%. Brijesh Damodaran,founder of WealthWays,a financial advisory firm says ULPs have not picked up well in the markets despite having great features like flexibility. ULP is a new concept and most insurance companies did not have a product to offer or if they had did not market the same, he says and adds that capping the high commission will benefit the customer who can benefit with higher amount being invested in the early days. Experts say universal life insurance may not be the best type of insurance as it is based entirely on assumed expenses and interest rates. So,if the insurance company's assumptions are incorrect,an investor loses the life insurance policy. The flexibility of the plan can also become a liability as it allows the policyholder to pay too little premium without realising the long-term impact on the policy. As policy assumptions can change from year to year,the flexibility in the amount of premiums an investor pays could result in the policy getting lapsed late when the investor cannot afford to make the higher premium payments to keep the policy in force.
