Articles

Variable insurance plans are not prone to market volatility, have transparent cost structure and offer guaranteed returns

Since last September, the insurance industry, particularly the life insurance space, has been subject to a host of measures the Insurance Regulatory and Development Authority (IRDA) introduced to safeguard policyholders' interest. After the Ulip guidelines, IRDA banned universal life plans because of the exorbitant charges associated with them. The regualtor subsequently issued new norms, capping the charges on universal life plans, too. Before the ban, only Reliance Life, Max New York Life, Aviva India and Bharti-AXA Life were selling such policies.

Till recently, post the new regulations, which came out in November 2010, only LIC had a universallifeplan,nowrechristened variableinsuranceplans(VIP)as per IRDA's diktat. But, last week, private life insurer SBI Life, too, launcheditsVIPSBIFlexiSmart.

THEN AND NOW

Universal life plans are essentially promoted as products containing the best of both traditional plans (guaranteed return) and Ulips (transparency in charge structure). The plans came under the regulator's scanner when somelifeinsurersstartedpushing themafterchargesrelatedtoUlips came down significantly. As against the relatively low charges in Ulips, some universal life plans had built-in charges close to 80% of thepremiuminthefirstyear.To put an end to the regulatory arbitrage being exploited by the insurers, IRDA put a limit on the charges of universal life plans, too. "The key difference between universal life plan (the earlier form) and VIP (the new form) is thechargestructure.IRDAcapped the charges and also prescribed the manner in which the charges would apply," says Sanjeev Pujari, appointed actuary, SBI Life. Now, the maximum expense charge that can be levied in the first year is 27.5%. In the second year, the charge reduces to 7.5% and from the fourth year onwards, it comes further down to 5%. The guidelines also instruct the companies to make it clear that VIPs will be available only as non-linked plans (and, hence, not the same as Ulips), to remove confusion in the insurance-seekers' minds. "Earlier, since there were no guidelines, product construction was left to the imagination of the companies concerned," says Suresh Sadagopan, financial planner with Ladder7 Financial Advisories. "VIPs introduced now come with more clarity and are more customer-friendly on the charges, declaration of guaranteed interest amount, flexibilities offered and so on.

The surrender values, especially, have improved tremendously after the newguidelineswereputinplace." Apart from prescribing a minimumlock-inperiodof threeyears for VIPs, the insurance regulator has also outlined the manner in which the surrender value is to be disbursed to the policyholder. If yousurrenderthepolicyafterfive years, you get the entire amount available in the policy account. During the initial three years, a surrenderrequestwouldresultin the balance amount in the policy account to be frozen. The amount will be payable at the end of the lock-in period. Until then, no expenses will be deducted and neither will any interest be credited. Also, the new regime stipulates thatthelifecoverintheplanhasto be at least 10 times the annual premium. In addition, the regulations state that in the event of the policyholder's demise, his/her dependents would be entitled to the deathbenefit(equaltotheguaranteed sum assured), plus the balance in the policy account. If the insured survives until the policy matures, he/she will get whatever balance the policy account has, in addition to any terminal bonus.

TRADITIONAL, NEW-AGE PLANS ROLLED INTO ONE

Like traditional endowment plans - that are being pushed harder, now that the commission from Ulips has reduced - VIPs also offer guaranteed returns. But, unlike endowment plans, which are opaque in terms of the charges, VIPs come with a more transparent charge structure - you know the amount that will be deductedfromyourpremiumbefore the balance amount is invested. "In traditional endowment, there is no concept of fund and, hence, no direct relation of premium with a fund value. In a VIP, there is a policyholder's fund. The current benefits are readily identifiable," says SBI Life's Pujari. Ulips, on the other hand, ensure transparency, but as the benefits are market-linked, their values could fluctuate in tandem with market movements.

"In a VIP, the rate of interest applicable is declared at the end of year.Itworkslikeabankaccount. Two rates of interest could be declared. One is interim and is declared at the beginning of the year. This will be applicable if some policyholders decide to opt out during the course of the year. The actual rate is declared at the end of the year and is used to calculate the year-end fund value. Currently, we are offering an interim rate of 7%," says Pujari. LIC's two variable insurance products - Bima Account I and II - promise a guaranteed return of 6%. "Both the products of LIC are similar and the difference is in termsof theentryageandsumassured (SA). LIC's Bima Account offers guaranteed 6% pa returns during the policy term. The guarantee offered in the SBI policy is just2.5%pa,thoughtheymention that they will declare an interim interest rate (7% at present), equal to or more than the guaranteed rate, at the beginning of every year. There is not much difference otherwise," says Sadagopan.

ASCERTAIN THE SUITABILITY

Before buying an insurancecum-investment product, you have to explore if it will fulfil your need for wealth protection and creation separately. If you are convinced about the utility of insurance products thatalsohaveaninvestmentcomponent, then you can move on to comparing products across companies and categories. "While our (SBI Life's) product allows the policyholder the option of skipping premium payments for up to two years, we are not targeting irregular income earners. Rather, it is meant to help policyholders tide over any temporary crisis," says Pujari of SBI Life.

The twin benefits of lesser volatility and more transparency are beingprojectedbylifeinsurersas a VIP's unique selling point. "There are flexibilities in VIPs that are not found in an endowment product," says Sadagopan. "For instance, in a VIP, the SA can be decreased or increased subject to certain conditions. Also topupsarepermitted. In VIP,interest rates are guaranteed, unlike an endowment plan which tends to be a with-profit policy. A VIP does not come with any rider; an endowment or any other traditional product can have riders," he says. If it were to be compared with Ulips, then a VIP being a nonlinked product, is not affected by market turbulence unlike a Ulip. "VIPs could be suitable for a conservative investor who wants guaranteedreturnswithoutmarket volatility," says Sadagopan. On the flipside, however, partial withdrawals are not allowed in a VIP, but a ULIP has provisions for the same.

"These products are typically suited for a conservative investor - given their greater transparency,theyarebetterpositionedas compared with other traditional products. It would also work well for someone who intends to alter theinsuranceorinvestmentcomponent at different stages of life. It may, however, not work well for someone looking for good returns from such investments," sums up Anil Rego, CEO of wealth management firm Right Horizons.