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For almost six months, the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) have been involved in a tussle to control unit-linked insurance plans (Ulips).

But, initial steps were taken much before. The market regulator fired the first salvo last June, when it removed entry load on all mutual fund schemes (effective from August 1). The high cost of Ulips immediately came into focus because of fears that distributors would peddle only these because of higher commissions.

Within a couple of months, Irda issued guidelines asking insurance companies to give benefit illustrations of net and gross yields at seven and 10 per cent for schemes up to 10 years. Earlier, they used to give this illustration at six and 10 per cent. The cost of Ulips was, effectively, cut by one per cent. It also limited fund the management charge at 1.35 per cent for a 10year policy and 1.25 per cent for polices with tenures of more than 10 years.

The shadow-boxing between the two regulators became a fullblown war last month. In midApril, the market regulator barred 14 insurers from issuing new products. The matter has since gone to the Supreme Court.

Irda finally moves

Meanwhile, the insurance regulator has started tightening screws on Ulips. A slew of measures have been introduced in the past few days to make these products more investor-friendly. Said Hitungshu Debnath, executive director (wealth management), Angel Broking, "The regulator is now introducing transparency that was long overdue. The initial steps are in the right direction." From July, insurers will have to give details of the commissions being paid. The premium allocation charge (PAC) is quite high for many products. In fact, some products have PAC of 100 per cent in the first year.

Also, insurance companies cannot introduce pension plans without life cover. Earlier, there were a number of Ulip pension plans without any sum assured, leaving the policyholder completely at the mercy of market dynamics.

Under the new guidelines for pension plans, no withdrawals will be allowed. At maturity, a third of the maturity value can be withdrawn. The rest of the money will have to be used to buy an annuity plan.

Market experts said this could help Ulip pension schemes better than other pension plans, but with market risk. "Whereas pension schemes under the Employee Provident Fund Organisation invest only in debt, Ulips will be able to invest 100 per cent in equities," said a financial planner. The two mutual fund schemes in this category, UTI Retirement Benefit Pension Plan and Franklin Templeton's India Pension Plan, invest around 35 per cent in equities and the rest in debt. Also, the New Pension Scheme allows up to 50 per cent investment in equities, but only in index schemes.

In addition, there is some tweaking with other measures. Top-up premiums would now come with a risk cover, instead of being invested entirely. Similarly, the minimum term of a Ulip will be five years and partial withdrawals will be allowed after that.

Issues still

But, costs, especially since these are heavily front-loaded, continue to be the main concern. Most Ulips charge the policyholder heavily in the initial twothree years. As a financial planner says, "This is too little. While it is important to make these products more transparent, it is also imperative to bring down costs." Kartik Jhaveri, director, Transcend India, a financial planning firm, says there are fundamental issues that need to be addressed. According to him, besides charges, there are issues with the benefit illustration.

"The seven and 10 per cent benefit illustration is not realistic for a market-related product. The returns can be much more if the investor chooses to invest 100 per cent in equities." Then, there is the mortality rate. On the one hand, the same insurance company sells aterm policy where the mortality rate is fixed through the tenure of the product. On the other, mortality rates keep rising for Ulips every year, thereby reducing returns.

Yes, the Sebi-Irda controversy has resulted in a lot of changes in Ulips. But, some fundamental issues are yet to be addressed.

* Declaration of commissions being paid to distributors

* Top-ups, pension plans to have risk cover; partial withdrawals only after five years

* Benefit illustration at 7and 10 per cent, instead of 6 and 10 per cent

* Fund management charges capped at 1.35 (for 10-year policy), 1.25 per cent (beyond 10 years)

Source : http://epaper.business-standard.com/