While ULIPs offer the best of both worlds - high returns and stable investment - policyholders must be made fully aware of its working, observes D. V. S. Ramesh while also spelling out how this can be achieved.
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As the Chinese adage puts it so aptly, 'Gather ye rosebuds while ye may'. The life insurance needs of a person crop up as soon as one enters life itself. However, various factors convince individuals against opting for life insurance products. The marketing of life insurance is always a matter of top priority at all levels. Over and above the recent concepts of globalisation, competition and innovation, the fundamentals of marketing concepts, such as keeping the policyholder well informed and making transparent disclosures will never fade out. In markets like
As interest rates dwindle, insurers have to look towards shifting the investment risks on to the policyholders by adopting investment-linked products, from the traditionally guaranteed long-term policies with prefixed premium rates. On the other hand, customers of insurers are also looking towards the market-linked returns on every bit of their investment. Unit-linked insurance products (ULIPs) allow customers to enjoy market-linked returns together with the option of having an insurance element based on their risk bearing capacity. It is the best option for the insurer to retain customers when interest rates look southward. Need for education on ULIPs By means of product design, the embedded characteristics of these products are transparency, flexibility, segregation of charges with the saving element and market-linked returns with a hedge against inflation. However, in a budding insurance market like
The marketing of life insurance is always a matter of top priority at all levels. Over and above the recent concepts of globalisation, competition and innovation, the fundamentals of marketing concepts, such as keeping the policyholder well informed and making transparent disclosures, will never fade out.
Policyholders have a right to all information pertaining to the policies they propose to take. This may be analysed in two parts - pres ale education and posts sale education.
Pre-sale education Since the product design is different from that of a conventional product where the sum assured may be based on the underlying fund value, the following are to be explicitly spelt out to the policyholder:
Functioning of the products The manner in which these products work, how they are different from the traditional/conventional life products and how the returns under these products are linked to the performance of the underlying capital markets have to be explained. For instance, a friend of mine once sought a clarification - when a life insurance company launched a unit linked plan, whether it was coming out with a public issue at Rs. 10!
Sum Assured
As against traditional products, where a policyholder can see the sum assured and claim it as well, in ULIPs, the life assured cannot see the sum assured. It is quite often linked to the premiums paid or the underlying policy fund value. The statement of accounts received by the policyholders offer information on the number of units and its underlying policy fund value. In quite a few products, the sum assured even affects exercising certain options like partial withdrawals. This is the area where the prospect is expected to know what exactly the sum assured is under the policy and how this is subject to various factors.
Charges
In conventional life insurance products, the charges are embedded in the policy features and are not shown separately. In ULIPs, the charges are segregated and thus made known to the policyholder, so that overcharging cannot be hidden.
Other options
One of the characteristic features of these products is said to be flexibility. The following are some of the key points:
- Availability of various investment fund options that suit the risk appetite
- Flexibility of premium payment options
- Availability of liquidity features like partial/full withdrawals
- Room for additional premiums called top-ups
- Switching of investment funds from one fund to the others
- Premium redirection offers
- Status of policies due to non-payment of premiums, lapsing and its revival
- Maturity options
- Terminology and nomenclature of terms, charges and procedure regarding the appropriation of charges.
-Post-sale education Avoiding a possible mis-sale
Under the provisions of the IRDA (Protection of Policyholders' Interest) Regulations, 2002, policyholders are entitled to the refund of premiums if they feel that the policy offered is not according to their choice. This is to be done within 15 days. This particularly suits ULIP policyholders in
Re-design the policy bond Providing the requisite information in a precise manner is one way of educating the policyholders. The policy bond is such a document that neither it entices the policyholders to read it nor can they understand the intricate terminology of these contracts. Re-design the policy bond in such a way as to draw the attention of the policyholders to the main factors, such as the funds offered, the terms of the contract and charges. Place all the charges and their appropriations in a tabular form at a single place.
Switching option
Switching amongst the available funds of the ULIP is one of its unique features. Unlike conventional policies, ULIPs allow policyholders to intervene at different points of time to transfer the funds either partially or fully from one fund account to the other.
In most ULIPs, the policy features generally offer more than one fund for the policyholder to choose from. This option is a special purpose tool that facilitates the policyholders in changing the investment portfolio based on their risk appetite and life stage. It will be prudent for the insurance advisors to not advise their policyholders to switch without specifically explaining its implications. In some markets, the regulators lay down certain guidelines for advisors. The policyholders are to be doubling cautious while exercising the switching option. The insurer should educate the policyholders on the pros and cons of this feature on a continuous basis.
Think long-term
As in all capital market-linked investments, the money in ULIPs needs sufficient time to grow. This is especially so in cases where higher upfront charges swallow a considerable share of the first few years' premium. The duration of investment horizon will have a significant effect on the final returns. With the investment fund options including a higher portion of investments in equity, policyholders need to be informed about the requirements of longer durations to enable the funds to grow, accumulate and generate reasonable and higher rates of returns.
Benefits of rupee cost averaging
The regular premium plans of life insurance premiums enable investors to benefit from the advantages of rupee cost averaging. The contractual obligation of the policyholders to pay continuously in regular intervals effectively reduces the volatility risks related with capital markets. This factor, if the policyholders are aware of, will significantly nullify the option of the risk cover being allowed to continue even in case of non-paymentof the premiums by appropriation of relevant mortality costs from the available policy funds. This awareness may reduce the policy lapse under these types of plans. This further will not lead to too many surrenders in the early years though policy provisions allow such options.
Working of equity returns
Policyholders should be aware that the returns under equity-linked investments outperform any other type of investments.
Investment does not translate into experience
Quite often, the investors may decide to invest in the stock market directly once they are exposed to such similar products. Let the policyholders be aware that investing in the stock markets directly needs dedication, study and analysis of the market and the possibility of their being carried away by market rumors. A less risky way will be to continue to rely on the professional fund management of the life insurers. The policyholders should be aware that by this means, the monies invested by them are diversified across various sectors of the markets. Thus, the risk is equally diversified.
Educating the stakeholders is part of business ethics. With innovative conceptual products breaking into the markets and with the introduction of alternative channels in the life insurance sector, the customers now have a more mechanical approach where they may be missing a personal, thorough and extensive personal finance review by their life insurance advisors. Hence, the role of life insurers is paramount in educating the holders of these policies. Policyholders invariably have a set of frequently asked questions (FAQs) on the available products and services. It may be appropriate for the life insurers to place the replies to these FAQs in various communications, advertisements and web portals (See list below.)
Educating the real stakeholders is one of the paramount duties of every agency, be it the government or the regulator. The agencies that are still striving to educate the public on various related matters are:
- The Investor Education and Protection Fund established by the Central Government in exercise of the powers conferred by clauses (a) and (b) of sub-section (1) of Section 642 of the Companies Act, 1956 read with sub-section (3) of section 205 C of the Act vide Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001.
- RBI educates the depositors on various matters like holding the deposits under 'either or survivor' mode, exercising the 'nominations'
It will be prudent for the insurance advisors to not advise their policyholders to switch without specifically explaining its implications. The insurer should educate for hassle free settlement of deposits and creating awareness on 'Grievance redressal forums' available in the print media at periodic intervals.
- In order to protect investor interests in the securities market, SEBI has launched the Securities Market Awareness Campaign, under which SEBI has made available educative
materials in various regional languages in addition to other measures.
- As per Section 38 of PFRDA Ordinance, 2004, PFRDA shall establish a fund for educating and protecting the subscribers of the pension fund. With the entry of private players and the consequential introduction of novel products, there is a need to educate the main stakeholders of the insurance industry as to the latent and intricate aspects of capital market-linked life insurance products. It is rare for the policyholders to have a close and clear study while choosing the products. Already, in shouldering the responsibilities of developing the nascent insurance industry, IRDA is spearheading a public awareness campaign at various fronts, both in the print and audio-visual media. It may be relevant to specifically focus on ULIPs at periodical intervals, inculcating greater awareness in the public.
The author is Assistant Director, IRDA. The views expressed here are his own.
P.S. By means of product design, the embedded characteristics of ULIPs are transparency, flexibility, segregation of charges with the saving element and market-linked returns with a hedge against inflation.
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