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For quite sometime now, I have admired the knowledge and acumen of Mr. Rajveer Chauhan, the insurance agent who has sold more than a dozen insurance policies to my parents and me. During a casual chat, he complained that he is unable to sell ULIP plans since the equity market is very uncertain. It came as a surprise because for one – the statement came from an experienced insurance advisor and two – the markets have always remained and will continue to be uncertain!

I was now looking forward to hearing his views and queries on ULIPs and markets. So, I participated in the conversation and started exchanging reasons for investing or not investing in unit-linked plans. He responded that his customers had a lot of questions and doubts and he was short of answers. He thought it was safe to wait for the market to undergo a correction and then he could peacefully resume to sell ULIPs again.

Usual Customer fears and questions are:

1. The basic fear of a customer is “Sensex is so high… does it make sense to enter the market now?”
2. Another fear of customers: “What happens if there is a market correction? In that case I would lose money, so why enter now? Why not wait for the market correction to happen before plunging into ULIP investment?”
3. Last but not least: “ULIP is related to the market returns. So if the market falls, I will lose all my money.”

Even though ULIP is a simple product, it is not clearly and properly understood by most. Some of the features of ULIP:

• Long Term Product - From September 2010, ULIP has a clause of 5 year lock-in along with minimum 5 years premium need to be paid. Moreover, no withdrawal is permitted before the 5 year lock-in period is over. Thus ULIP is necessarily a long term product. If the customer is looking at short term returns and wishes to exit the product as soon as the minimum requirement of lock-in is over, then ask him to park his funds in other short term products like Mutual Funds, etc and not ULIPs. This is a long term product and it can never yield good returns if compared with short term products. It definitely has other benefits but it is surely not a short term investment opportunity.
• Flexible - ULIP offers a wide range of flexibilities like Partial Withdrawal, Switching from one fund to another, Loans, Premium Redirection, etc which other insurance and investment products do not.
• Transparent - The charges are categorically mentioned in the brochure so that customers are fully aware of all the charges long before investing their funds. No other products mention their charges so explicitly
• Goal based - In ULIPs there is a wide range of funds to choose from according to the investment goal of the individual.
• One stop solution - ULIP being a mixture product provides both protection along with investment. Previously customers had to opt for different product for protection and a different one for investment purpose. Now it is a much easier task since both the benefits are provided under the same product namely ULIP.

Now, to answer the fears and the doubts mentioned by Rajveer, I provided him with some answers and clarifications:

ULIP is usually associated only with equity and debt is completely forgotten. ULIPs have both Equity and Debt fund Options. But whenever people talk of ULIP, they immediately associate it with equity market and the debt and money market fund is conveniently forgotten. So, if you feel that it is not the right time to invest in the equity market---don’t! Just invest in the debt fund but boycotting ULIPs only because the equity market is on a high, completely doesn’t make sense.

Equity funds have a maximum equity exposure of 100% and minimum exposure of 40-60%. Thus in a bearish market, when the fund managers believe that the market will fall and not rise further, they keep only the minimum exposure in equity and park the rest of the funds in debt or money market fund where the market correction will not affect the NAV so heavily. Only when the market is bullish again and they believe that they will profit from the equity market rise, they slowly and steadily move the funds out of debt and money market funds to equity products.

Concept of switching- People ask for switches only while purchasing a policy and seldom exercise the option during the entire tenure. The option of Switching can be exercised very effectively.

-          You can invest in debt fund if you are bearish about the equity market

-          And then switch to equity fund when you consider the market to be bullish again

Anytime is a good time to invest as long as your goals are set right and you know why and where you are investing. Rajveer seemed convinced with the above explanations but many of us still hold some apprehension against the equity markets. The only way to get over this fear is by getting our basics correct about the equity markets and its functioning.

You have gone through tons of advice and inputs on investments and now finally made up your mind to start investing. You’ve worked out the annual investment amount, the duration of savings and now the only question left is which financial product to avail? Should I invest in ULIPs, Mutual Funds/SIPs or both?

Highest NAV guaranteed products were the flavour of the season in the last couple of months – and it continues to be so. These products are Unit Linked Insurance Plans or ULIPs in which the insurance company guarantees the customer the highest NAV which the policy has achieved in the entire term of the plan.

On paper these schemes sound very attractive as customer as the customer is enticed by the highest NAV clause. In reality, the life insurance companies would ensure that the NAVs do not rise dramatically because they would then need to pay the customer basis that high NAV when the policy matures. So they would invest substantial amounts into debt instruments which give low but fixed returns. So these products should not be expected to do as well as equity oriented schemes. But these facts are not really part of the documentation.

There are some positives to these plans also. To get the highest NAV, the customer would need to remain invested till the maturity time of the product. So it forces the customer to a long term product, which as an insurance plan is a good thing.

IRDA has asked 2 life insurance companies on the need for such products. This came up as the 2 life insurance companies had sent their highest NAV products for approval to IRDA. Some of the old highest NAV schemes have been very successful as was the case of LIC’s wealth plus scheme.

It remains to be seen, if IRDA approves the plans from these new insurers.

September 2010 was almost like a new era for life insurance business in India. The lucrative commissions which were being paid to life insurance middle men got reduced slightly. Ulips were made much more customer friendly and aligned more towards a life insurance product with increase coverage levels. The lock-in period was ULIP was also increased.

While all this was great for the customer, not all participants have benefited from it. Life insurance companies had to pause and take a hard look at how business was being sourced. The internal cost structures needed to have a close and hard look. Expenses had to be controlled and payouts needed to be reduced. While most life insurance companies would be impacted in the short run, the fact that Ulips have become more customer friendly will result in more sales in the longer run.

It may not be the same for the distributors though. Companies which were relying largely on sale of only Unit Linked Insurance Plans have taken a hit. The drop in commissions means that the distributors would have to almost double their productivity if not more. Now that does not come easy. HTMT has confirmed that they had to shut their insurance sourcing business as it was no more lucrative enough to do the same. Some 300 employees had to be re-settled to other processes because this line of business was no more attractive enough from a business point of view.

There are some pains which the industry would go through. But in the long run, life insurance companies will evolve and move to sustainable sourcing channels.

A customer friendly move is always a good move!

Last six months have seen quick and decisive actions from the insurance regulator in India. In yet another move to ensure consumer confidence, IRDA banned the sale of Universal Life Policies from today.

This action was taken by IRDA after a lot of customer complaints were received by the regulator with regards to universal life policies. More...

Types of Sum Assured in ULIPs:

The Death Benefit in a ULIP is not guaranteed, i.e. the minimum payable is Sum Assured but the maximum may vary according to the fund performance.

Sum Assured is the Minimum Guaranteed Death Benefit. Having known the Sum Assured alone, gives only part of the information. When death actually happens, the Fund Value plays an important role. Since we cannot know that in advance, thus is the saying that Death Benefit in ULIP is NOT guaranteed, however the minimum Death Benefit is surely guaranteed.

SBI Life Insurance has launched a new Unit Linked Insurance Plan (ULIP) called Saral Maha Anand. This is the third ULIP launched by SBI Life Insurance after the new norms came into play on 1^st September 2010.The other 2 Ulips launched by SBI Life Insurance are Smart Performer and Unit Plus Super. More...