ULIPS 2.0

Insurers are required by Irda to set the minimum internal rate of return IRR at about 6 per cent at the end of each year. The gross return has been fixed at 10 per cent,assuming an investment horizon of five years. In other words,if the annual investment is Rs 1 lakh,the gross return will be Rs 10,000 and the net return Rs 6,000. The company would thus have to work within a margin of Rs 20,000 for five years Rs 4,000 a year for five years,which is much less than the 40-50 per cent upfront charges that customers paid earlier. In fact,in certain cases the policy charges were as much as 100 per cent,says V Viswanand,Director 8211; Products amp; Persistency,Max New York Life Insurance.

But,competition will force companies to better the minimum IRR stipulated by the regulator. The actual improvement depends on specific product design,tenure and the ticket size but it can be estimated that the IRR will improve by approximately 50-75 basis points at the 10-year tenure, Harpal Karlcut,Chief Executive Officer,Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited said. The IRR could even go up to 7 per cent for a five year investment depending on the ticket size etc and 7.75 per cent for over 10 years.

The difference between gross and net yield or the IRR,in insurance parlance,is termed as the reduction in yield RIY. This is likely to reduce in Ulips 2.0. Thus,products will offer a better value for the customer,points out Karlcut. If the net IRR improves by 50-75 basis points over 10 years,then the RIY will also drop by the same amount.

If you are planning to invest in ULIPs,be prepared for a lock in period of five years as fixed by the new guidelines. This has been changed from three years stipulated in the old Ulips. But the penalty for quitting the scheme now will be much lesser. According to the new Ulip lapsation guidelines,companies can retain 15 per cent as the maximum first year charge and Rs 3,000 as surrender penalty. So,even if a person has paid only one premium he will get much of his money back. Earlier,companies made money from lapsed schemes once the investor stopped paying premium.

In other words,investors cannot expect returns to accrue unless their investment outlook is medium to long term. The product will cease to be a short term investment option of 2-3 years only, says Viswanand. Another reason for this is that the insurance component is mandatory now. Since viability of the product will be based on persistent renewal of premium,the companies will build the product over stability and maturity,two attributes associated with insurance.

The protection component will be higher now at least 10 times the investment. For every Re 1 invested,companies will have to offer a life cover of Rs 10. Right now the cover provided is 7-8 times and post September 1,it can go up to 12-15 times,says Vishwanand. The agent will most likely sell Ulips more as an insurance product than as a short-term investment instrument. This is a paradigm change in the way Ulips are sold by agents,who were more than just aggressive till yesterday.

In line with this all unit linked products,other than pension and annuity shall provide a minimum mortality cover or a health cover under the new ULIPs. The minimum mortality cover is likely to be divided on the basis of age. One could be the minimum sum assured for age at entry below 45 years and the second could be the minimum sum assured for age at entry of 45 years and above,says a practitioner with a leading bancassurance firm.

For single premium contracts,the cover is expected to be pegged at 125 percent of single premium and for regular premiums RP including limited premium paying LPP contracts it is likely to be 10 times the annualized premiums. At no time the death benefit shall be less than 105 percent of the total premiums including top-ups paid. Further,all top up premiums made during the currency of the contract,except for pension/annuity products,must have insurance cover treating them as single premium,as per the new guidelines.

As far as commission charges are concerned,insurance companies claim there is a wrong perception that these are one of the highest in the world . Commission rates are about 14 per cent in the first year and about 2.5 per cent on renewal. They are likely to drop to single digit levels. However,the minimum ticket size of the product is likely to increase to Rs 30,000 or more for the product to be viable for companies. This implies that the product may actually be out of reach for the common man, says Rajesh Relan,CEO,Metlife Insurance.

The insurance to market investment component will,however,depend on the risk profile of the customer. For instance,Max New York Life MNYL uses a poll to assess risk appetite of customers. Typically,if you go for high returns the risk is high and this is one thing not usually emphasised by agents. We determine your income,age,and make. Some people prefer real estate investment some commercial. These are things we determine. If you are the fixed deposit type of customer then returns usually are 7-8 per cent but for higher returns,higher risk needs to be taken, says Viswanand.

The accumulated fund value of unit linked pension / annuity products is the fund value as on the maturity date. With the new ULIPs taking shape,all ULIP pension / annuity products are expected to offer a minimum guaranteed return of 4.5 per cent per annum or as specified by IRDA from time to time,on the maturity date. This guaranteed return is applicable on the maturity date,for policies where all due premiums are paid. In the new Ulips,mortality and / or health cover could be offered along with the pension/annuity products as riders,giving enough flexibility for the policyholders to select covers of their choice.

As of now there are pension products in the market,which are termed as pure pension with no insurance cover attached to it. However,from September 1,the risk coverage part will become essential. The overall effect of these Ulip changes would not only give an upper edge to the customer in terms of choosing the right product in line with her needs,but will also usher in a paradigm shift in the way the insurance sector is looked at by customers. There are three channels in insurancethe insurance agency,bancassurance and institutional alliance or brokers. Hitherto,some products offered a commission of 84 per cent under the broker channel.

After these changes,there will be a level playing field where in these channels would be deducting roughly the same charges giving more freedom to customers to chose among them.

The bancassurance channel,say experts,will also get a fillip. The reason is that some banks have already expressed their intention to provide a basketful of all financial products with insurance assuming top priority. Although the agency channel,may take a hit initially and show downside progression,as time would progress agents involved with need based selling would actually take hold of the market,say experts.

Overall,this means that after September 1,Ulips will provide better customer value and lower charges than previously. While it is necessary to evaluate ones financial protection and long-term investment requirements and also ones risk-return appetite before making a purchase decision into Ulips,the potential customer can be assured that the net effect of charges is capped by the IRDA and hence he/she is buying a more cost-efficient product, says Karlcut.

However,this is likely to have a dampening effect on the moneys raised by insurance companies through their Non-Resident Indian NRI portfolios. With NRIs investing upto Rs 40-50 lakh in one go,the portfolio was doing rather well. But this is unlikely to remain the same as foreign investments are not so forthcoming when insurance becomes a mandatory component, says an industry practitioner. This will hit volumes as NRIs dont prefer investments where the lock in period is more. u

gunjan.pradhanexpressindia.com