At the ULIP's end

With the insurance industry heavily promoting unit-linked insurance plans over other insurance products, the axe was sure to fall somewhere. And the Insurance Regulatory and Development Authority (IRDA) did just that by banning complex ULIP products called Capital Unit Gains or the Actuarial-Funded Capital Unit products.

Similar schemes have been banned in the UK and Australian markets because customers found these difficult to understand, though such products were never introduced in the North American markets. These products have lower overheads for the life insurer, are less capital intensive, and spell greater profits for insurers.

Two insurers—Aviva Life and Bajaj Allianz—have been selling such products, the former for the last four years and the latter adopted it as recently as a year ago. The products were introduced with a spin to provide something new for investors. Says Sanjay Jain, Head (Marketing), Bajaj Allianz Life Insurance: “We introduced this product to cater to those wanting something new and there are people who would like something different from other usual ULIP products.”

But insurers insist that the product is good. “If IRDA objects to this, we will either try to convince it or work on pushing our other products,’’ says Sam Ghosh, CEO, Bajaj Allianz Life.

A front-ended ULIP is the typical product, which charges 30 per cent or 40 per cent by way of overheads in the first year. That means only 70 or 60 per cent of your premium paid up gets invested and again a portion of this is allotted for life insurance. Second year onwards, these charges (in most cases) come down to 1.5 per cent or thereabouts and stay that way. A customer, when he sees his accounts, understands how much has been invested from the premium paid and how many units he accumulates at the end of the first year, and thereafter. This leaves little room for confusion.

In a Capital Gains Unit product, on the other hand, the charges are back-ended. The premium is invested upfront. A person gets capital units (regular units) in the first year, but subsequently, he gets only accumulated actuarial units for the premium. These actuarial units are valued by the actuaries and this value is not disclosed to the policyholder.

This often confuses the policyholder who assumes that he is getting regular units at the regular disclosed NAVs (net asset values). Also, fund management charges are high. Other back-ended products are there in the market, but they are unlike the actuarial-funded plans. Birla SunLife’s ‘Dream Plan’ invests 100 per cent—but the accumulated units keep cancelling out for expenses in the future. Understandably, the company has to recover heavy overheads and pay up its shareholders, so these expenses are recovered periodically over time.

Nevertheless, in a clear back-ended scheme, the unit holder can see how many units are credited in his account, the number of the units that have got cancelled towards various payments and then conclude how his investments have fared. But in ‘actuarial units’ as there is no such clarity, the products were banned. That’s one step forward in simplifying the business of insurance.