Merits & Demerits of ULPs
Soon after it came out with guidelines on unit-linked insurance plans (Ulips), Insurance Regulatory and Development Authority (Irda) made public its intention to put regulations in place for a relatively new category of products — universal life plans (ULPs). The regulator's move is said to have been prompted by some players building high commissions into these products.
The market is abuzz with reports of some of them trying to push them instead of Ulips, given the changed circumstances — Ulips are no more hot favourites of insurance companies and their agents, as they don't pay huge commissions, drawing customers in droves. ULPs are still at a nascent stage in India, with only four life insurance companies — Max New York Life, Aviva Life, Bharti-AXA Life and Reliance Life — selling such policies currently.
Best Of Both The Worlds?: While ULPs offer guaranteed returns like traditional plans, they are also more transparent when it comes to disclosing charges — this is billed as their unique selling point. Here they are closer to Ulips. "They will rank as in-between products — combining features of Ulips and traditional plans. For all practical purposes, ULPs are traditional products with some flexibility built into them," says certified financial planner Suresh Sadagopan of Ladder7 Financial Planners. "The flexibility is usually in the form of freedom to modify the premium payable, or the sum assured," he adds. The cover — or sum assured — is a function of the premium paid (in most cases, 10 times the premium paid). Moreover, depending on the product, the policyholder is allowed to make withdrawals from his/her account by the third or the fifth year of the policy.
"In the past couple of years, the volatility in the stock market has helped improve the awareness about the risk-averse profile of Indian consumers. This has created the need for products that offer guaranteed return and capital preservation," adds Rajesh Sud, CEO, Max New York Life. "While traditional plans offer these benefits, they lack the transparency policyholders enjoy with Ulips. Universal life plans are primarily life insurance contracts with a bias towards protection and they offer secure returns. Given the transparent nature of charges in a universal-life design, customers are likely to find such products as complementary to traditional participating products. A minimum guaranteed interest rate applicable throughout the term of the policy will serve as a viable alternative for a consumer with a conservative risk profile."
However, the assurance of guaranteed returns also means that the investments will be made predominantly in 'safe' fixed income instruments, including government securities. Unlike traditional plans, the charges such as premium allocation and policy administration are disclosed upfront, introducing some transparency in the structure. The plans typically come with a guaranteed interest rate that is declared at the beginning of every quarter or year. In addition, the policyholder will be entitled to loyalty additions as per the insurance contract.
Source: economic times
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