I come from a middle class family, and seeing my family and friends getting ripped off of their hard-earned money pained me no end. I saw them at the mercy of an agent who would paint a rosy picture and make them buy insurance savings products that came with several years of lock-in period, but provide dismal returns of 3-4 per cent at the end. These were mostly endowment products with low returns and high agent commission. Even after one realised that these products were not efficient, there was no way out because of high surrender charges. If surrendered after paying say three years’ premium, one would roughly get back 30 per cent of the total premiums paid.
Endowment plans continue to be inefficient products when it comes to investment, but unit-linked insurance plans (ULIPs) are now completely different from what had existed in the market previously. It wasn’t that ULIPs were always good products, but over a period of time, these have evolved into investment options that are more competitive. Currently, ULIPs are competitive to mutual funds (MFs). While the share market has had its share of ups and downs owing to various factors, structure of ULIPs has undergone a major transformation.
Prior to 2010: The bad bully
Once introduced as an effective insurance option, the popularity of ULIPs dipped due to exorbitant front load costs and other fees that the distributors charged and paid to their agents. In addition, widespread mis-selling of the product as a three-year savings plan added to the woes of the investors who were tricked into buying the products. Those willing to put their money in ULIPs in those days were made to understand that since the lock-in period was limited to three years only, they would have to pay their premiums for the period not exceeding three years as opposed to the necessity of continuing to invest for full term of the policy in order to yield good returns.
Disappointment of policyholders after they realised that a major portion of the premium they had paid were expended as expenses charged by the insurance companies, and that the net fund value was much lesser than the amount they had invested led to low persistency ratio of continuing to invest in ULIPs. Most policyholders refused to continue paying premiums and let the policies lapse.
From 2010 to 2015: The correction phase
The Insurance Regulatory and Development Authority of India (Irdai) after realising how unrealistic promises made by distributors and agents had duped the investors’ money to the tune of crores of rupees and how ULIPs were continuously being sold under perfidious conditions clamped down the industry’s working by implementing certain guidelines. The intent behind introduction and compulsory execution of the guidelines was mainly to improve the returns that investors earned by bringing down charges and ensure that policyholders understand ULIPs as long-term products.
Pursuant to enactment of the guidelines in September 2010, the various charges associated with ULIPs were limited, lock-in period was raised to five years in place of three years and minimum protection cover was increased to 10 times the annual premium paid. The increase in the minimum cover was mainly to ensure an appropriate insurance cover to the policyholders, while raising the lock-in period acted as a safeguard to protect the investors’ financial interests.
Most people bought ULIPs under the impression that paying premiums for a limited term allowed them the dual benefits of both insurance and advantages of market-linked investments. Tendency of agents to misguide policyholders into believing that they would gain high returns as a percentage of the premium is invested in equities was also a cause of concern.
Irdai via its circular (Cir. No. IRDA/ACT/CIR/ULIP/102/06/2010) put cap on charges that were fixed on Unit Linked contracts with a tenure of 10 years or less and for those with tenure exceeding 10 years.
The net reduction in yield for policies with term less than or equal to 10 years shall not be more than 3 per cent at maturity. For policies with term above 10 years, the net reduction in yield at maturity shall not be more than 2.25 per cent.
This means that the total charges over the lifetime of the policy cannot exceed three per cent.
From 2015 to 2017: The evolution phase
In 2015, the structure of charges associated with ULIPs underwent a major change with HDFC Life Click2Invest doing away with both policy administration and policy allocation charges. The rest of the costs including mortality charges and fund management charges were capped to about 1.45 per cent. A similar plan, SBI LIFE — eWealth Insurance limited its premium allocation charges to Rs 45 in the first year only, decimated its policy administration charges, while the total of mortality charges and fund management charges were limited to roughly 1.25-1.50 per cent of the annual premium paid.
And now the beginning of game-changing phase
Even as scars of being a bad and expensive product still continue to haunt its existence, insurers are now further raising the stakes by making it a zero-commission cashback-based product. They are now structuring the product that is much more cost-effective.
Edelweiss Tokio Life-Wealth Plus, a unit-linked insurance plan, proposes to charge nothing during policy administration and premium allocation and the company also promises to its customers an added allocation amount (equivalent to a percentage of yearly premium) that increases every five years.
The policy also allows for payment of Premium Booster, to its investors, beginning from the sixth year till the end of the premium paying term. Couple of other insurance providers are also following suit and have filed their products with the regulator. Soon, we might see companies such as Max Life and Bharti AXA who are currently in the process of bringing out similar low-cost ULIPs announcing policies with features synonymous to other low-cost ULIPs.