Investors wary of traditional insurance plans, prefer Ulips
Low returns, lack of transparency and flexibility make traditional endowment policies less attractive for investors.
The new guidelines on unit-linked insurance plans (Ulips) have forced the insurance industry to shift its focus from Ulips to traditional endowment policies.
One of the reasons for this shift is the higher commission structure under traditional plans, that allows insurers to pay higher fees to distributors who are primarily responsible for bulk of the sale.
After the new Ulip guidelines came into force from September 1, 2010, commissions to agents selling Ulips have come down from as high as 40% to 5-10%. The commissions in traditional products, however, remains unchanged. The Insurance Act allows insurers to pay commissions to agents up to 40% of the first year premium in traditional endowment plans.
"Commissions payable to agents on sales of Ulips have come down drastically to as low as 7.5-10%. Agents have, therefore, lost interest in selling Ulips. As private companies are yet to break even, they have shifted their focus on traditional plans so that sales keep ticking," says Vivek Karwa, a certified financial planner and director, Vridhi Investment Intermediates.
According to Uco Vegter, chief marketing and strategy officer, ING Vysya Life, the shift to traditional plans has also been driven by the fact that the Ulip retirement segment has become unviable, which earlier contributed significantly to Ulip sales.
The new Ulip guidelines stipulate a 4.5% guaranteed return on unit-linked pension plans, which insurers are not keen to assure over the long tenure of these plans.
However, while traditional endowment plans serve the business purposes of both insurers and insurance agents, do they serve the purpose of an insurance buyer?
An endowment insurance policy is a combination of both insurance and investment, wherein an investor gets a lump-sum either as death benefit or maturity benefit if he outlives the tenure of the insurance plan. Endowment policies could be unit-linked (or Ulips) or non unit-linked (traditional).
TRADITIONAL PLANS: A SNAPSHOT
Traditional endowment plans can be participating (with profit) or non-participating (without profit). In a with-profit traditional plan, the insurance company shares with investors the profit from investment made by the particular plan. The profit is added to a policyholder's account every year in the form of bonuses. The maturity benefit in with-profit plans is the basic sum insured plus the accrued bonus over the years.
In without-profit traditional plans, the death benefit or the maturity benefit is equal to the sum assured.
INVESTMENT RESTRICTIONS
The Insurance Act puts an upper cap of 15% on equity exposure of traditional plans. However, individual insurers can set a much lower equity exposure cap owing to the fact that it adds to volatility of returns. Rest of the portfolio is invested in government securities, infrastructure and corporate bonds.
Due to debt-heavy portfolios, returns from traditional plans are in the range of 4-7% every year. Besides, high upfront commissions means lesser amount goes into investments in the initial years.
For long-term investors, who stay invested for 10-20 years, a 4-7% annual return is very small compared to returns given by Ulips, which can give 10-20% annual returns on the higher end. This makes traditional plans unattractive for those seeking double-digit returns.
Sadique M Neelgund, a certified financial planner, says, "Though the term of traditional plans is long, investors cannot participate in equity markets."
FLEXIBILITY FACTOR
Compared to Ulips, traditional plans lack flexibility in terms of choice of assets and fund options. Ulips offer different fund options such as growth (high equity exposure), balanced (hybrid) and conservative (high debt allocation) to investors.
Traditional plans on the other hand do not offer investors the flexibility to decide the kind of portfolio- aggressive or conservative- they can have for their policy.
"In a traditional plan, the customer cannot determine how his money is being allocated in stocks and debt and what percentage goes into each category. But in Ulips you have choices of funds. Also, one can switch during the period of 15-20 years from one fund to another," says Rajiv Jamkhedkar, CEO, AEGON Religare Life Insurance.
LACK OF TRANSPARENCY
Traditional endowment policies also score poorly when it comes to transparency.
Unlike Ulips, traditional plans do not disclose the investment portfolio and therefore, you have no hint of how the bonus (in case of 'withprofit' plans) that is added to your account every year is arrived at.
In contrast, Ulips post the fund factsheet on their websites and even send the hard copy to policyholders at least once a year. One can also track the NAV (net asset value) of a Ulip on a regular basis.
Traditional plans, owing to low returns, high cost and lack of flexibility, are not ideal investment option for investors and can be replaced by Ulips or a combination of mutual funds and term plans.
One of the reasons for this shift is the higher commission structure under traditional plans, that allows insurers to pay higher fees to distributors who are primarily responsible for bulk of the sale.
After the new Ulip guidelines came into force from September 1, 2010, commissions to agents selling Ulips have come down from as high as 40% to 5-10%. The commissions in traditional products, however, remains unchanged. The Insurance Act allows insurers to pay commissions to agents up to 40% of the first year premium in traditional endowment plans.
"Commissions payable to agents on sales of Ulips have come down drastically to as low as 7.5-10%. Agents have, therefore, lost interest in selling Ulips. As private companies are yet to break even, they have shifted their focus on traditional plans so that sales keep ticking," says Vivek Karwa, a certified financial planner and director, Vridhi Investment Intermediates.
According to Uco Vegter, chief marketing and strategy officer, ING Vysya Life, the shift to traditional plans has also been driven by the fact that the Ulip retirement segment has become unviable, which earlier contributed significantly to Ulip sales.
The new Ulip guidelines stipulate a 4.5% guaranteed return on unit-linked pension plans, which insurers are not keen to assure over the long tenure of these plans.
However, while traditional endowment plans serve the business purposes of both insurers and insurance agents, do they serve the purpose of an insurance buyer?
An endowment insurance policy is a combination of both insurance and investment, wherein an investor gets a lump-sum either as death benefit or maturity benefit if he outlives the tenure of the insurance plan. Endowment policies could be unit-linked (or Ulips) or non unit-linked (traditional).
TRADITIONAL PLANS: A SNAPSHOT
Traditional endowment plans can be participating (with profit) or non-participating (without profit). In a with-profit traditional plan, the insurance company shares with investors the profit from investment made by the particular plan. The profit is added to a policyholder's account every year in the form of bonuses. The maturity benefit in with-profit plans is the basic sum insured plus the accrued bonus over the years.
In without-profit traditional plans, the death benefit or the maturity benefit is equal to the sum assured.
INVESTMENT RESTRICTIONS
The Insurance Act puts an upper cap of 15% on equity exposure of traditional plans. However, individual insurers can set a much lower equity exposure cap owing to the fact that it adds to volatility of returns. Rest of the portfolio is invested in government securities, infrastructure and corporate bonds.
Due to debt-heavy portfolios, returns from traditional plans are in the range of 4-7% every year. Besides, high upfront commissions means lesser amount goes into investments in the initial years.
For long-term investors, who stay invested for 10-20 years, a 4-7% annual return is very small compared to returns given by Ulips, which can give 10-20% annual returns on the higher end. This makes traditional plans unattractive for those seeking double-digit returns.
Sadique M Neelgund, a certified financial planner, says, "Though the term of traditional plans is long, investors cannot participate in equity markets."
FLEXIBILITY FACTOR
Compared to Ulips, traditional plans lack flexibility in terms of choice of assets and fund options. Ulips offer different fund options such as growth (high equity exposure), balanced (hybrid) and conservative (high debt allocation) to investors.
Traditional plans on the other hand do not offer investors the flexibility to decide the kind of portfolio- aggressive or conservative- they can have for their policy.
"In a traditional plan, the customer cannot determine how his money is being allocated in stocks and debt and what percentage goes into each category. But in Ulips you have choices of funds. Also, one can switch during the period of 15-20 years from one fund to another," says Rajiv Jamkhedkar, CEO, AEGON Religare Life Insurance.
LACK OF TRANSPARENCY
Traditional endowment policies also score poorly when it comes to transparency.
Unlike Ulips, traditional plans do not disclose the investment portfolio and therefore, you have no hint of how the bonus (in case of 'withprofit' plans) that is added to your account every year is arrived at.
In contrast, Ulips post the fund factsheet on their websites and even send the hard copy to policyholders at least once a year. One can also track the NAV (net asset value) of a Ulip on a regular basis.
Traditional plans, owing to low returns, high cost and lack of flexibility, are not ideal investment option for investors and can be replaced by Ulips or a combination of mutual funds and term plans.
 Birla Sun Life Insurance CFO Mayank Bathwal says Mayank Bathwal, chief financial officer, head, institutional sales, Birla Sunlife Insurance How are customers benefitting from the new Ulips regulations? The new regulations are in customer's interest and have made Ulips attractive compared to other investment instruments. The new regulations are aimed at firmly placing Ulips as a long-term investment product. Are these plans now more focused towards achieving specific financial goals? Ulips are a combination of risk and investment elements and are designed to meet specific consumer needs. They provide flexibility and transparency and helps investors to save systematically to meet specific lifecycle needs. Assetallocation must be done carefully depending on life stage, risk appetite etc. The products are differently structured under various solution baskets such as pure protection, child insurance to wealth protection and pension products to meet these specific life cycle needs. Ulips are now more or less standardised. Do you think there is still scope for innovations in these products? Soon after the regulatory changes were announced, Birla Sunlife (BSLI) introduced a balanced portfolio and, thus, can currently boast a well-established product suite designed to meet all lifecycle needs of consumers. We will continue to innovate and launch new ULIP products to offer good product offerings to the customer. At the same time we have seen a surge in demand for traditional products as well and hence we have managed to innovate even in this category for the last 18 months. We have seen good success in the nine months or so with 40% of our sales coming from this category. |
