Where Education is Critical - Informing the customer is the key for the success of ULIPs

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 India, people often consider insurance a waste, as one is over-sure of never requiring it. Against this backdrop, a savings element, which is made a part of the insurance premium in respect of endowment type of products, encourages people to view insurance products as savings together with protection.

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 India where the life insurance industry has stuck with conventional products and where awareness of the capital market is abysmally low in the retail segment; the concept itself requires customer education before being introduced in the market. Education in this context, as in any other, is a continuous process.

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 India. One of the solutions to avoid a mis-sale is for the insurers to bring the factors influencing the ULIP specifically to the notice of the policyholders at the time of dispatching the policy bond.

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.

Panch Tattva Insurance - A Rational Analysis

Dear Friends,

PANCH-TATTVA PHILOSOPHY

You may be wondering as to how I have called my insurance philosophy as Panch Tattva Insurance. The insurance is a very vast field and the complications have arisen due to the differently named products by different companies. Further, these products are sold to less/no knowledgeable by the less/no knowledgeable in the most cases. The career in insurance was not a likeable one until the time you had the single player, which also worked under pressure to only look for the safety of the capital of the insurance policy holder, and had no desire or the need to show exemplary savings growth. They even did a very wrong thing i.e. reward the policyholders in an skewed manner. Some had to be satisfied with lesser share in the fund growth pie and some had larger share than it should have been rightly given. The gullible public had no choice; it did not know exactly what was happening to really be able to raise a finger.

Now I take the opportunity of explaining what the vedic Panch Tattvas namely Prithvi, Jal, Agni, Vayu and Akash mean and where they fit in to the philosophy of insurance that I have given you.

PRITHVI-TATTVA: The Gross Basis to Life

The Prithvi Tattva is the grossest of all, it denotes the physical building blocks that can be seen, felt etc.In our scheme of things the property owner ship is the first thing for it can not be stolen, it can not be destroyed, it yields returns as rent and may be used in other requirements etc., it grows in value but has the disadvantage of hassles in managing it and of illiquidity and there are costs involved in exchanges. Therefore, you have to invest in it but only to the extent of 25% of your saved capital for having the feeling of stability and as hedge against inflation. I may further tell you that a house in the hometown may not be considered as having the asset acquired out of the savings for security. It is properties apart from the family house in the hometown that I am discussing about.You may buy property only in middle years when enough capital has been saved for the purpose,till then this notional 25% of the yearly saving will form part of Unit Linked Endowment Plan and would be topped up with extra money if available for creating a money pool for buying property and growth(Under Vayu Tattva catagory this has been suggested in follwing paragraphs).

THE JAL-TATTVA :The Sustainer of Life

After this comes the 'Jal Tattva'. The water is needed every day and all through ones life. When the sources on the surface are no more there, we dig well to have water. Similarly, the Unit Linked Pension Plans are necessary to be taken early in one's life and regularly an amount affordable i.e. roughly 25% of your current savings should go in to balanced fund under this plan. This represents such part of income which sinks in to form a reservoir like rainwater seeping in below the earth's surface forms an under ground water reservoir out of which we take out water when the surface water is not sufficient. This pool, created over the years, comes in handy at the start of no income period due to retirement or due to loss of income earning capacity. Since the money is kept in balanced fund and not tinkered with, it keeps growing very steadily without worry or anxiety(it has been obseved that at times the interest bearing instruments give better returns and at other times the equity investemnt gives better return,since this is for long term both give balanced returns without making you sorry for deciding this way or that). The insurance companies manage the funds under pension plans in more conservative ways hence one may be rest assured about the out come.

THE AGNI-TATTVA: The Enhancer of Life

Third comes the 'Agni Tattva'. The fire is considered the basic need of the civilised world. It has to be handled with care. It rewards by adding value to otherwise non-usable stuffs. We should have 25 % of our savings in Gold and Silver, which are very good carriers of purchase power and easy encashability in case of need. These metals also beat the inflation surely. As the fire cannot be left without keeping an eye, these metals also we have to be kept an eye on and handled with care.This is such an asset which can be stolen or misplaced(in todays times it can be kept in bank lockers for safety).You have to buy it from the most reliable source as mixing of cheaper metals is done very commonly.You may even convert it in to gold ornaments and silver utensils for use otherwise than for security.With this your feelings would remain elated and you would not feel under thumb of some body in case of emergent needs to be fulfilled.This is also good for meeting partly the marriage related expenses as some gold or silver is necessarily bought on such occasions.

THE VAYU-TATTVA: The Provider of Riches

Now comes the case of 'Vayu Tattva'.This is a still more subtle element. We cannot see the currents of winds changing course but the winds are the most responsible factor for weather changes. Similarly, the stock market trends have to be carefully understood and at times, you should have investment in shares and at other times not in shares. This reshuffling is a difficult task and involves costs of brokerage, depository charges, and govts' taxes like STT, LTCG TAX, STCG TAX etc. but the Unit Linked Endowment Plan has the features where these taxes and brokerage and other charges are avoided. Since for faster growth, money has to be kept invested in shares also, we may do so by keeping 25% of our investible savings in to the growth fund under a Unit Linked Endowment Plan. This gives you the tax saving advantage under section 80 C and gives you protection under life risk cover in proportion to your chosen premium level. You are further able to have health related cover in this plan. These plans also have the liquidity after a period of three years. Because of the facility of topping up, you can manage your extra savings on this platform and withdraw money for any big-ticket purchase or for expenses for marriage in family or for any other big need. Switching without charges for 24 times in a year is special feature in HDFC SLIC's plans. Besides HDFC SLIC's fund managers have beaten the index by a margin of about 10% p.a. over last three years. With power of compounding, the money here grows so much faster that can only be understood by the real life examples; if you have the time, your consultant has the inclination to demonstrate it to you.You gain complete control in case of this plan after the third year and the policy continues even if you decide to go on a premium holiday due to tightness of funds in hand due to change in circumstances.You are allowed to resume paying premium later on.Is it not a wonderful thing?

THE AKASH-TATTVA: The Most Subtle Element of Life

In Indian mythology the five basic elements are considered necessary for the life to be sustained, it is the combination of these five elements in balance that the life has its course without problems. You have seen here that the economic life also has to have the balance in order to keep the physical existence fully enjoyable. Worry is the worst of the afflictions of mind. We must try and keep our worries at bay. We also know that death is a reality and a certain one but at the same time when it will occur is the most uncertain phenomenon. In addition, we know that families find stability as long as the income is regular and supposing the income earner for the family meets an end to life suddenly, the miserable times for the family ensue. Last of the 'Panch Tattvas' i.e. Akash-Tattva' is subtlest of all. It is said we keep marching towards death continuously and the footfalls of approaching misfortune can not be seen and they don't make noise either and this can be likened to 'Akash Tattva' which also is neither seen nor does it make noise. It is a householder's mundane duty to have ample provision for the family in case of his sudden demise. This need, however, in today's times can easily be taken care of. Therefore, the first advice for the person just starting the working life and the family life is to have life risk cover under a term plan, which comes at quite nominal premiums in younger years. It should be with the double benefit in case of accident. Businesspersons know that the creditors flock at the doors of the person who has just passed away and the debtors are not seen anywhere near. Therefore, the funds involved in business are not recoverable by the family members and hence the risk cover should be bought with this in mind.

TIMES HAVE CHANGED SUDDENLY BUT YOU DO NOT HAVE THE FACILITY/TIME TO LOCATE THE RIGHT PERSON FOR THE RIGHT ADVICE IN RESPECT OF YOUR INSURANCE NEEDS. YOU SHOULD WAIT UNTIL YOU COME ACROSS A PERSON WHO UNDERSTANDS THE NUANCES OF INSURANCE AND FINANCIAL CROSS CURRENTS AND NOT SETTLE FOR ANY LESSER PERSON AS ADVISOR.

NAME OF THE INSURANCE PLAN DOES NOT CONYEY MUCH

As you may be aware now that just the name of plan does not convey much. I have simplified the matter by telling you that the Unit Linked plans are the most transparent and the money growth opportunities are immense here(you may refer to earlier posting titled 'you are in your middle years and are afraid of old age'). I have further analysed as to how much should be kept where with the long-term view without having to suffer unduly on account of sudden changes in the environment. By the principles expounded there, you may yourself take care and stay afloat. In case you have an advisor still more experienced, you will be enabled to take extra advantages by scientific switching between the funds.

Your Consultant: A Freind

The broader framework has been explained. An expert will make it still more suitable after the facts about the income are given and if he knows expenses and structure of family along with personal leanings. Please talk to him with an open mind and know him as your friend and if required make him your confidant..

I may have missed out some point, please do not hesitate to bring it to my knowledge to enable me to explain.

Hari Om

Krishna Kumar Khandelwal

You are in your middle years and AFRAID of old age,if so, please read on

Dear Friends,

The joint family system is breaking down. Earlier fewer needs were taken care of by just hoarding some precious metals and buying up some property. Today you live in a nuclear family. In addition, the life span has increased and we see people short of money in old age. Some families, we see, have suffered due to sudden death of income earner. There are still more families who have suffered due to investment of savings in wrong areas. Most of them also suffer due to inflation eating away their meagre savings.

There is an adage in India that ‘Lakshmi’ is ‘Chanchala’ by nature. The ‘Chanchala’ nature of ‘Lakshmi’ is more at play in modern times .Melt downs and frenzy like conditions are playing havoc with people’s money. You are at a loss to understand as to what is best for yourself.

An approach to saving and investment with an eye on SAFETY and suitable return is necessary. Precisely, to take care of all the anxieties, the following two-step approach would work well:

First Step: At the beginning of the career, a term cover along with health cover according to income should be bought. Luckily, good companies at nominal premiums are offering this.

Second Step: Transfer, pooled savings, year to year, to following pockets:

1. 25% of gross savings of the household should be kept in the form of gold and silver (ornament or bullion).
2. 25% of gross savings should be invested in landed properties(till such time the money available is not sufficient to buy property it should remain invested in the desired fund through the top up on your regular premium Unit Link Plans. When the money is accumulated is sufficient to buy property it may be withdrawn and used for buying the property)
3. 25% of the savings should be saved in pension plans ((preferably through investment in to balanced fund under Unit Linked plans)
4. 25% of saving should be going into Growth fund in a Unit Linked Endowment Plan, which will provide you the life risk cover and health risk cover too.

You may wonder why I have pressed upon the Unit Linked Plans. This is slightly intricate matter.Acually my experience has shown that these plans are most cost effective and transparent and provide perfect tax shelter under section 80 CC as also the returns on the funds invested remains tax free when received in hand upon maturity or earlier withdrawal also.

Your worries have a solution now. There are institutions, which are reliable and offer to meet the precise needs for protection, for growth etc. Since the time of launch of Unit Linked Plans in Feb 04 by HDFC Standard Life Insurance Company Ltd., I have sold only these policies and none of the traditional policy although the commission to the agent is one of the lowest in these plans. To my satisfaction, the funds have grown at over 20% p.a. for most of the holders; however, those who desired to remain invested only in interest bearing and gilt-edged securities for fear of stock markets meltdowns have far exceeded in returns compared to Bank FDs. and all without the TDS headaches.

You may rest assured that if you follow the above policy would find your self smoothly sailing through any kind of circumstances and trying times that develop in your life in future.

I am sure you would want to be enlightened about certain aspects you have in mind. You may contact me at my mobile no. 09376168780 and I would only be too happy to call or pay you a visit.

Wish you the best in your life.

Hari Om

Krishna Kumar Khandelwal