Remove the weeds if you want a healthy insurance portfolio

Remember that insurance is for protection. If that is understood, one will never go wrong

Suresh Sadgopan, 24/12/2014 Mint


Insurance is an area that cries for attention in people’s financial portfolios. As planners, we dread the prospect for the most part for there is a thicket of policies that needs to be gone through. We, as planners, generally examine these and validate the need for keeping these policies in the portfolio.

On an average, a client will have about a dozen policies. And usually, these will be endowment policies, moneyback policies, unit-linked insurance plans (Ulips), and occasionally, the term policy. It is ostensibly to take care of children’s education/marriage, retirement and so on. But many times, there is no logic as to why so many policies were taken.

Very few people have actually made the effort to find out whether the policy chosen is suitable for their requirement, what the policy benefits are, it’s costs and so on. What usually happens is that the distributor would have asked them to go for the policy and they purchased it for the amount of premium they felt comfortable with. Nothing was ever discussed about how much was really required for education or which vocation the child might choose. The only thing discussed was how much the client can spare for the premium.

Myth about traditional policies

The media onslaught on Ulips has had one positive and one negative after effect. The positive development is that due to the heat that was turned on Ulips, charges have come down drastically. The fallout, however, is that the perception now is, Ulips are very costly and unsuitable products. Even today, consumers and even those from the financial services industry believe that.

This has created an opportunity for buccaneers in the financial services industry to push traditional products, whose structures are opaque. Traditional insurance policies take as much as 100% of the first-year premium towards charges (which we can gather from the fact that the first-year premium is not taken while calculation of surrender charges). However, taking advantage of the flawed perception, distributors push traditional insurance policies.

Reviewing policies

Insurance is about providing security. Hence, a simple term insurance is an effective low-cost solution. How does one decide what to do with the forest of policies accumulated over time? Here is what one could do. First, you should check if the policies are still relevant. Policies with sum assured of something like Rs.1 lakh or Rs.2 lakh may not be relevant in current circumstances—the amount is simply too small to matter. It would be advisable to make these policies paid-up or better yet, surrender them.

The second check is whether the policy can even remotely meet the intended goal? In most cases, it will not be able to, as the policy was not given due consideration at the time of purchase.

The third check is if the insurance premium payments are affecting achievement of one’s goals. In many cases, they are. And in some cases, so much money has gone into insurance that all savings are through insurance alone. In such cases, surgery is in order. Many insurance policies that are directly affecting cash flows would need to be surrendered and others, which cannot be surrendered for some reason, can be made paid-up. With some types of policies, one may need to either partially withdraw or take loans to make things work.

The fourth check is to see how to simplify the portfolio itself. An unwieldy portfolio of, say, 15-18 policies, is difficult to manage, even if it does not suffocate the cash flows. At least there is no real problem here. It is a good idea to simply weed out the small, unwanted policies, even though one has to take a hit in the form of losing out on the money paid as premiums.

The fifth check is to see if the ongoing charges are high and if by keeping the policy, one will end up with a measly return. If true, then it’s a case for surrendering and investing elsewhere.

The sixth, and final, check is to find out if the policies give the basic yield that a debt product gives on a post-tax basis. For instance, if a traditional policy is offering 5.5-6% returns, it would roughly be equivalent to what one would get from a fixed deposit or post office investment, on a post-tax basis. If debt allocations are required in the whole portfolio, some of the insurance policies can be allowed to stay as part of overall debt allocation.

One needs to clearly understand that while surrendering, there will mostly be a loss on even the premiums paid. All due considerations outlined above have to be taken into account before arriving at a decision. Insurance portfolio has to be managed well. It grows like weeds because most people keep buying policies that they do not need. The problem is compounded when a friend or relative is selling the policy. The portfolio has to be pruned and maintained, much like a garden. Remember that insurance is for protection. If that is understood, one will never go wrong.




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Should you redeem your ULIP?

Is redeeming your unit-linked insurance policy the right choice?

by Arnav Pandya, Financial Chronicle 22/6/14


One of the questions that a lot of investors ask advisors relate to their unit-linked insurance policies (Ulips). Many of them have been holding these policies for a significant time period. During that time, many Ulips might have shown a value less than even the cost price. Now with the markets on an upswing, they are seeing an improvement in value. The amount in many cases has turned positive or has started showing a significant return. This is interesting from the point of view of investors because they are now faced with the question of what to do with the investment: should they sell and redeem the money?

Investment goals: The goals that have been set by an investor are a very crucial factor in the whole process of deciding on whether it is time to sell the Ulip. If there was a certain goal for which the Ulips were purchased and that goal has been achieved, then there would be no sense in continuing with the investment. A very good example of this would be an investment that was meant to generate Rs 5 lakh that would help in the purchase of an asset – or maybe a foreign trip — when it was planned several years ago. Now if that value has been reached and the goal has been achieved, then there is no need to continue with it. Hence no harm would be done by bringing the investment to an end.

For the long term: Most Ulip investments are for the long term, which could stretch from 10 to 15 years. In several cases, it could be that this period has been completed or is nearing completion, so sale is definitely an option. Also if the investor is witnessing a good return coming in on the investment, then a redemption would ensure that the investor goes to the next phase of the process. This would be a positive as far as the investor is concerned and they should be looking at making use of the good times currently being witnessed in the equity markets for the purpose of meeting personal financial goals. It should not be that they convert the long term to the short term out of desperation and not for any concrete reasons.

Patience: Often the investor loses patience with an investment and hence mentally decides to sell out because he is tired of tracking it and just wants to shrug off the burden. However, this attitude needs to be avoided since there is a good chance that the decision is not going to be appropriate or the most suitable one. This is the reason why we keep saying patience is key for an investor, especially in an investment like a Ulip, and they should ensure that patience is not lost even when times are tough and the going is not easy.

Returns: There are a lot of people who just look at the returns and feel disappointed that it compares unfavourable with several other options in the market. However, one has to ensure that the details that are being compared are correct: one should not compare oranges and apples. It is also important for investors to ensure that they are not overwhelmed by the short-term noise that they might hear in the market, making them lose focus on the long term. So do not take steps that can unravel all the hard work done over the past many years. The final objective for the investor should be effective use of the money.


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Five Ways to Spot Insurance Mis-Selling

Here are a few ways to protect yourself from being sold an inappropriate life insurance policy

Vivina Vishwanathan, Mint 25/4/2014


A television commercial by a leading insurance company shows a financial adviser being hounded by a devil-like creature who disappears when the adviser continues to give the right advice to the prospective client and not cut corners. A couple of years back, another leading insurer had launched a campaign explaining the importance of paying attention to the basics before buying a life insurance product.

There is enough anecdotal evidence to suggest life insurance is often mis-sold. In fact, the industry now accepts this and the sector regulator has instituted reforms to control the menace. The efforts have certainly improved sales practices but not completely plugged the hole.

What can you as an individual do to protect yourself? How do you spot the devil in the detail? Here are a few simple ways to spot mis-selling.

Hear the opening pitch

Life insurance is a long-term product because you need insurance for the most part of your working life. Even as an investment product, it works only if held for a long term because of the embedded costs. However, it’s more difficult to sell a long-term product, so, to make their jobs easy, agents often approach you with a short-term insurance plan. If the words ‘short-term’ and ‘insurance’ come in the first few sentences that an over-eager insurance agent mutters, run. Rahul Aggarwal, chief executive officer, Optima Insurance Brokers Pvt. Ltd, said, “If your agent says ‘I have a good short-term savings product of three-five years’ and gives you details of an insurance product, you should stay away from that agent because life insurance is not a product meant to give short-term benefits.” The main purpose of life insurance is to protect your family and assets financially in case of unforeseen events.

Another example is when insurance is bundled with other financial products or passed off as a freebie. For instance, you take a home loan and instead of buying a pure term insurance, which you must buy to protect your dependants from having to repay the loan amount should you die, you are sold an insurance plan with returns. Or, say, you are visiting your bank to open a Public Provident Fund account or a recurring deposit account and the bank employee directs you to an individual who offers a product that gives similar or better returns and insurance as bonus. This, again, is a red flag, as insurance is not a by-product of investing.

See standard illustration

When you sit down to understand the calculation for a traditional plan or a unit-linked insurance plan, if the agent gives you a handwritten calculation instead of the insurance company’s standard illustration of the calculation for the life insurance product, alarm bells should ring.

“An agent or distributor who wants to sell the product for her own benefit will show her own calculations where the predicted returns will generally be in double digits. This is definitely not the right way to portray the benefits. So ask for the company illustration of the calculation,” said Kapil Mehta, managing director, SecureNow Insurance Broker Pvt. Ltd. The agent should have this information readily available. Or, you could check it on the insurance company’s website.

Fill the form yourself

When you get a job offer, do you sign the contract without reading all the details? Of course not. So why would you sign insurance documents without reading them first? “Most insurance agents who want to push an insurance product will offer to fill the form for you. You will only be asked to sign at the relevant places. This is not the right practice,” said Mehta.

By reading all the details and filling the form yourself, you will be able to understand all the details of the policy—what’s included, what’s not, surrender value, grace period, and much else. You can also get any doubts clarified. Even if the exercise is difficult, it helps you fully understand the product and minimize chances of error such as in name, age, address, nominees and more.

Check the product name

Every insurance company sells multiple policies—term plans, unit-linked insurance plans or traditional plan. Under each category there will be products with slight variations. “It can happen that the agent contacts you for a particular product but ends up selling another. For instance, you get a call for an insurance policy while you are taking a home loan, but instead of selling you a policy customized for loan products, the agent sells you a traditional policy,” said Mehta. Hence, ensure you check the product name while filling the documents.

Also, beware of agents who ask you to not bother about the medical details required in the form. “They do this because if there is a medical issue, the company will have follow-up questions. The agent wants to avoid this as she is not bothered about the claim part. What matters to her is sales,” said Aggarwal.

Wait for insurer to call

As a part of best practices adopted, most life insurance companies will make a call after the agent has explained the product and you have paid the first cheque. The insurers make this call to ensure that you have understood the terms and benefits of the policy correctly. If you realise at this point that you didn’t buy what your were explained, you can return the policy. “Whenever an agent or a distributor sells you an insurance product, you should get a direct call from the company. If you don’t, something is not right there,” said Mehta.

There have also been cases of imposters calling up on behalf of the Insurance Regulatory and Development Authority (Irda) and offering to help policyholders exit a life insurance policy and invest the money in better investment products. Irda does not call individual customers offering to help them exit plans.

A lot of the hard sales push in insurance draws upon the basic human emotions of fear and greed. The minute you feel that the agent or distributor—who may well be a friend, a family friend or a neighbour—is talking of very high returns with very little risk, stay away. Avoid too-good-to-be-true products. If you still want to buy it, don’t sign on the documents right away. Instead, ask for the policy brochure and go through it carefully.


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Aviva Family Income Builder Plan

Business Line, 13/8/12


Private insurer Aviva India today launched Family Income Builder, a traditional plan in which one pays for 12 years and gets double of what they have paid every year for the next 12 years, guaranteed.

The product also comes with built in waiver of premium benefit, which ensures that in case of death during the policy term, no further premiums are required to be paid while the income remains guaranteed between 13th to 24th year, the company said in a release issued here.

“Recognising the customer need for guarantee in their investment in the current scenario, we have launched Aviva Family Income Builder, a transparent insurance plan with a simple proposition of doubling one’s premiums and ensuring a regular flow of income. We aim to create value for our customers and deliver on our promise of prosperity and peace of mind,” Aviva India Managing Director and CEO T R Ramachandran said.

Aviva Family Income Builder product has been designed basis a customer survey — consumer attitudes towards savings conducted by IPSOS worldwide.

The survey highlighted that with low economic confidence nearly 33 percent of customers are keen to get a guaranteed return on their investments worldwide.

In India too, 56 percent of customers are not willing to take a risk on their investments and are looking for guaranteed returns, it found.

In addition, nearly 44 percent of Indians are not confident about meeting unexpected expenses in the future, the survey revealed.

Hence, there is clearly a market for a product, which not only gives guaranteed returns but has the proposition of doubling premium ensuring a regular flow of income.

Aviva India is a joint venture between Dabur Group and Aviva Group.

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Why we need a completely different insurance business

Dhirendra Kumar, Economic Times 21/5/12


Suddenly, there’s a spate of media reports and analyses on how the Insurance Regulatory and Development Authority (Irda) may be in the process of bringing in a new set of stricter rules on a class of insurance policies known as traditional policies. The headlines of these news articles are instructive.

‘After Ulips, traditional plans come under Irda scanner’ and ‘Traditional plan clean-up begins’ are two typical headlines. The word ‘crackdown’ also appears in some articles. All in all, this is the kind of language you would expect to find in news stories describing how policemen are cracking down on drug peddlers or pickpockets. The facts in the stories are straightforward.

Through 2004 to 2010, insurance companies raked in money hand over fist by peddling Ulips which appeared to have been expressly designed, in terms of commission levels and structure, to be mis-sold . Millions (literally) of insurance agents made money hand over fist milking unsuspecting customers.

In 2010, Irda put an end to the great Ulip robbery by bringing in a new set of rules that, compared to the earlier ones, made Ulips a lower-cost and relatively more customer-friendly product.

At that point, the insurance industry had a collective change of heart, cleaned up its act and started enthusiastically selling products that were good for the customers . OK, those of you who know how this business works can stop laughing now, the previous sentence was obviously a joke. What actually appears to have happened is that the insurers shifted focus wholesale to the so-called traditional plans.

And sure enough, two years down the line Irda finds that it’s time for another crackdown or clean-up or whatever you’d like to call it. Suddenly, there seems to be a realisation that these policies combine high commissions, low transparency and poor returns. Essentially, they are tailor-made for the manufacturers and sellers and harmful for the customers. What do you think will happen now?

My guess is that if Irda succeeds in cleaning up traditional plans, the way it has with Ulips, then the insurance business will basically shut down in India. Albert Einstein defined insanity as "doing the same thing over and over again and expecting different results". I think it should be clearly recognised that cleaning up products one by one is not the solution.

There is something more fundamentally wrong with the insurance business. This could be in its structure, or the mindset of people who run it or have invested in it, or something else. In any case, the industry is in the process of proving that it can flourish only by screwing its customers.

Amusingly, the idea that the insurance business is all about ripping off its customers is now so deep-set that a big insurance company-Max New York Life- has based a major ad campaign around it.

The TV ads show an insurance salesman refusing to mis-sell. It’s actually quite a perverse idea – an entire ad campaign whose underlying message is "we know you expect insurance salesmen to be cheats, but we are able to resist the temptation" . But full marks for being honest about the problem anyway.

If this cleaning-up is to succeed, then it’ll only be when we have a completely different kind of insurance business. The fundamental problem is products that mix the very different goals of investment and insurance. Once you have that, you are on the slippery slope of increasing product complexity , higher selling effort, higher costs and all of it eventually has to come from the customer’s pocket.

Somewhere , the broader goal of providing the safety net of insurance cover to a large mass of Indians is completely forgotten. Unless the insurance business is redefined as only real insurance , this contradiction at its heart won’t go away and this cycle of anti-customer behaviour and endless clean-ups will go on.

The author Dhirendra Kumar is CEO, Value Research


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IRDA Bans Highest NAV Guaranteed Products

Niladri Bhattacharya & Yogini Joglekar, Business Standard 14/5/12


The Insurance Regulatory and Development Authority (Irda) has asked life insurers to stop selling highest net asset value (NAV)-guaranteed products.

In a recent communication to all life insurers, the regulator has said, “The marketing of products labelled as highest NAV product shall not be allowed”. These products contribute almost 20 per cent to the total premium collection of life insurers.

Irda, in the past eight months, had informally expressed its discomfiture with such products at several fora. The regulator’s argument was that such products led to systemic risks associated with the way funds were managed and posed the risk of a heavy sell-off in equities when stock markets fell.

Highest NAV-guaranteed products are those that promise to pay the highest value the fund achieves during a certain period, say, five or seven years. However, to maintain that NAV consistently, insurers have to take risks by investing in stocks aggressively. That could lead to undue risks.

These products had become the largest selling unit-linked life insurance policies (Ulips), after the new guidelines on Ulips came in September 2010.

In another move, the Irda has mandated a minimum death benefit of at least 10 times of the annualised premiums in case of traditional products, as there were some products offering a limited death benefit. The regulator has also discouraged the use of single premium or limited premium payment term polices as these could impact the cash flow management of companies. Accordingly, Irda has proposed all polices have a regular payment option equivalent to the term of the policy.

Single-premium polices might be issued only under special categories.

“In most of these products, customers are being lured with the promise of a decent maturity benefit, but in case of claims (in the event of death), the benefits or the amounts are sometimes lower than the premiums. The basic underlying principle of a life insurance policy is it should have sufficient life risk cover,” said an Irda official.

The regulator has expressed reservations on policies offering “low” or “insignificant” life risk covers. Irda has pointed out three types of traditional plans on such grounds — products where the death benefit is defined as the return of premiums (with or without interest), products in which the initial death benefit is significantly high and reduces subsequently during the currency of the contract and products in which the insurance cover is insufficient/insignificant in relation to the premium i.e. products which are mostly meant for savings. “We would not allow such products. It was clearly a marketing gimmick from the insurers,” said a senior Irda official. In case of unit-linked policies, the Irda mandates a minimum sum assured guarantee of roughly 10 times of the annual premiums (in case of death). However, for traditional plans, there was no such mandate. The Irda is likely to come out with the final guidelines on product design soon, which would include all such details. It is not approving any products until life insurers design products according to the framework suggested.

"Lately more complex products are being designed and filed for F&U (file and use) clearance with the Irda. In the process of clearing these products, the Irda has noticed that features of several products are not in alignment with the best practices and, frequently, lack clarity. The efficiency of product clearance has been constrained by such features,” the Irda said in its communication.



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Charges on ULIPs and Traditional Insurance Plans

While the commissions on Ulips have gone down due to the cost caps, those on traditional plans continue to remain high

Deepti Bhaskaran, Mint 13/3/2012


Tremors were first felt by unit-linked insurance plans (Ulips) in 2009, when the Insurance Regulatory and Development Authority (Irda) decided to clean up the product to make it cost effective. In 2010, a full-fledged earthquake hit Ulips with the regulator cutting costs drastically. The Ulips’ loss, however, became traditional policies’ gain.

Back to traditional

According to Irda’s FY11 annual report, almost 60% of the first-year business was concentrated in traditional plans or what the insurers call non-linked business.

First-year premiums are indicative of the new business or policies procured by the insurers; a tilt towards traditional plans indicates that companies are selling more traditional policies. Agrees Gaurav Rajput, associate director marketing, Aviva India Life Insurance Co. Ltd: “Before the reforms, Ulips constituted 80-90% of the business but since then have come down to about 40-50%.”

The possible reasons: This return to traditional plans has been attributed largely to the consumer psyche of shying away from the volatile stock market and wanting the safety of guaranteed returns that traditional plans offer.

But there is another less visible truth—traditional plans offer agents higher commissions as compared with Ulips. Accepts G.V. Nageswara Rao, managing director and chief executive officer, IDBI Federal Life Insurance Co. Ltd: “The costs in Ulips are capped, hence commissions have shrunk considerably. Relatively speaking, traditional plans fetch higher commissions.”

Commissions in Ulips

In 2010, Irda capped the costs in Ulips as a percentage reduction in yield. So for Ulips with a tenor of at least 10 years, the cap was 2.25 percentage points. In other words, if the fund is performing at say 10% per annum, the final return should not be less than 2.25 percentage points for policies with a tenor of 10 years or more. Further, in order to give you more surrender value in case you decided to hop off mid-way, Irda announced cost caps during each year of the policy tenor.

Also See | The Commission Shift (PDF)

As a result of such strict cost caps, the commissions in Ulips shrunk considerably. According to Irda’s annual report, the average commission in Ulips as a percentage to premiums collected in Ulips was around 9% for the private sector in FY09 as compared with just around 4% in FY11.

Commissions in traditional plans

Compare the Ulip commissions with those of traditional plans and the trend has almost reversed: the average commission in traditional plans as a percentage to premium was around 8.47% in FY09 for the private sector; this increased to around 12% in FY11.

Says Kapil Mehta, managing director, SecureNow Insurance Broker Pvt Ltd: “Since these numbers are as a percentage of total commissions to total Ulips, the difference does not look very huge. But if you were to compare first-year premiums and first-year commissions, this trend will be more stark since commissions are highest in the first year.”

Unlike the cost cap that keeps commissions in Ulips low, commissions in traditional plans are guided by the maximum limit on commissions as defined in section 40A of the Insurance Act, 1938. According to this Act, an insurance company which is less than 10 years old can pay up to 40% of the premium as commission in the first year to an agent. In the second and the third years, the insurance company can pay a renewal commission up to 7.5% of the premium and 5% for the rest of the term of the policy. For companies that are more than 10 years old, the first-year commission is capped at 35%.

While the average first-year commissions in Ulip is about 5-8% because of the cost cap, in traditional plans it can go up to 40%.

Explains Rao: “Typically, short-term policies of less than 10 years have low commissions of up to 15%, but longer term policies typically up to 20 years have a higher commission of up to 35%. This is because the average ticket size of long-term policies is small and it is more difficult to sell long-term products.”

Focus on traditional policies

Since insurers have shifted focus from Ulips (which are not as profitable as they used to be) to traditional policies, it will not be incorrect to say that insurers are now selling high-commission products.

“The traditional portfolio has increased and since insurers are now focusing on long-term products they are selling long-term traditional products. Commissions in long-term products are higher than short-term products,” said an industry source, who didn’t wish to be named.

What it means for you?

Sadly, for traditional plans that double up as investment plans, the costs are not mentioned. But the data establishes a point: commissions in traditional plans are much higher and as insurers continue to do more business in traditional policies, commissions as a percentage to the traditional premium will continue to look up.

Traditional products are expensive investment products that usually give returns less than the inflation rate. In fact, in 2006-07, when the markets were witnessing a bull run and Ulips became very popular, the insurance industry largely condemned traditional products as those with low returns. But now that they are back on the popular demand of “guarantee seeking investors”, you should know that not only are you settling for lower returns but also paying a higher commission.


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