Life Insurance in India has been gaining prominence over the past one and a half years as investors have increasingly begun to seek safer investment havens. The Life Insurance Act 1938, marked the nationalization of Life insurance in India. Domestic Private Insurers entered the industry in 1994, followed by the entry of foreign participants in 2001. Having started off with the plain vanilla term insurance plans, Indian life insurance industry has expanded manifold to include a multitude of life insurance products that serve protection needs as well as wealth building requirements of the investors.
Competing with hordes of other investment avenues spanning direct equity, mutual funds to fixed income products, Insurance stands out scoring on its dual offering of life cover with comparable earning potential. The best part of the insurance investment is that its market linked products give adequate equity exposure while ensuring better safety and thus lower risk. We now find out how the ULIPs do it.
Investment in the equity markets relatively safer when done through Unit Linked Insurance Plans. Here is how.
IRDA, the Insurance regulatory authority in India, has laid down a set of mandates that guide the Indian life insurance companies with investing in the Indian equity markets. The investments directed to the equity market through Unit linked Insurance plans have to follow a strict set of guidelines.
• Equity Exposure [Curbing Scrip-wise and Sector-wise concentration]
- Can not exceed 20% of total capital employed by the Investee
– Can not exceed 15% of total capital employed by that group of companies
– Can not exceed 15% of total capital employed in all such companies in the industry
• Equity shares of the Company shall be listed on any recognized stock exchange and the price should continuously been quoting above par at least for 12 months prior to the date of sanction of loan.
• Dividend Record: At least 10% for the last 5 years or 15% and above for 3 out of 5 years
• Debt-to-equity ratio should not exceed 2:1; Interest coverage not less than 2 times.
Trends in the Life Insurance in India:
From the time the equity markets world-wide began losing steam in the aftermath of the sub-prime crisis in late 2007, risk aversion amongst the investors has been on the rise. With no clarity emerging in equity markets the past 15-18 months, investors have preferred to remain on the sidelines and adopt a wait and watch approach. This lowering risk appetite has made investors turn to insurance with a vengeance. ULIPs have come into limelight due to the safety factor attached to them. Also, investors are increasingly opting for Accelerated Premium Payment plans that finish off their financial obligation faster, for eg; Single Premium Plans and ULIPs that offer the flexibility to pay the total premium for the whole term of the policy within the first few years.
Single premium plans:
These plans limit the financial obligations of the investors. The present world wide slowdown and economic uncertainty has made most investors risk-averse which prohibits them from making long term commitments. Single premium plans offer great amount of growth potential by the way of power of compounding. The growth in single premium plans has been on the rise in the past 3-4 months (Jan-May 2009), growing by almost 50% as compared to the past 1 year.
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Source: Religare PFS Research
The single premium plan yields a higher maturity value as compared to a regular premium paying plan wherein the total premium under both options is the same. In the above example, we have Rs. 5 Lac compounding to Rs. 40.4 lac in a 25 year span under the single premium plan. Compared to this, the regular payment option grows to Rs. 16.8 Lac. Even a regular premium plan which totals to Rs. 10 lac (double the amount under Single premium) we still find that the total maturity value is lower as compared to Single premium plan.
Aegon Religare Life Insurance (ARLI) offers the single premium payment option in unit linked plans like Star Child plan (Min. Rs 50000) and Pension Plan (Min Rs. 1 Lac). LIC recently came up with market-linked single premium plan Jeevan Astha with received good investor response.
ARLI Star child plan:
Star child plan is a wealth building ULIP offered by Aegon Religare Life insurance. Opting for the single premium payments enhances the total fund value received at maturity of the plan due to the power of compounding. Another benefit of single premium under this plan is the incidence of lower premium allocation charges for single pay option.
Guaranteed products
These plans are being preferred for their safety feature. While we have traditional plans like Money Back and Endowment plans offering capital protection, some ULIPs have also joined the bandwagon of guaranteed products. But they differentiate themselves by offering guaranteed maturity value at the end of the policy term or a minimum return guarantee on the premiums paid. Demand for guaranteed insurance products has gone up in the recent months, rising by 15%-20% in the past 4 months, as compared to the 12-month period.
Aegon Religare Guaranteed Return Plan – A close-ended plan that guarantees growth of the single premium at a compounded rate over the 7-yr or 10-year span. This means that the amount invested doubles within the stipulated 10-years. GRP does not invest in equity markets. It rather focuses on fixed income instruments.
Birla Sunlife Dream Plan – Guarantees a gross 3% return on the accumulation of all premiums paid till date. The plan offers the options of Guaranteed Maturity Benefit of 100%, 200% or 300% of amount we choose as the GMB at start of the policy.
Combo Insurance Plans
Another trend that is picking up is to combine different insurance products and creating hybrid plans in order to achieve higher life cover with better returns and at a lower cost. One of the examples could be combining a level term insurance with a ULIP. Since ULIPs invest in the market, the life cover provided under such plans is generally lower. By combining this product with a term plan, we can achieve a reasonably higher level of life cover as well as get a significant exposure to markets. When we compare this combo product with a regular wealth building ULIP, we find that investor can get a sizeable gain on the maturity fund value front as well as in terms of life cover.
One such example is to combine ARLI Premium Gain Plan with ARLI Level term plan where the investor can achieve better returns and higher life cover at the same cost as getting a regular ULIP with similar life cover.
Pension plans
Pension plans are preferred from the long term savings perspective. Investors may or may not opt for a life cover along with the pension plan. These plans offer a withdrawal facility of upto one-third of the total maturity fund value at the time of maturity. This 1/3rd amount is tax free to the investor. The remaining 2/3rd is used to pay a fixed annuity to the investor throughout her life (whole life). The amount per annum depends upon the interest rates prevailing at that point of time and
ARLI Pension plan:
It is a high-yielding pension plan that offers the flexibility to opt for level / increasing premium payments during the life of the policy. Investors may opt for the increasing premium plan which takes care of the inflationary effect on the fund corpus. Moreover, the investor has the option to come back to level premium payment if he/she wants to continue at a steady rate of premium. According to the new IRDA rule, the investor has to maintain a minimum level of 40% of the initial premium paid, when she shifts from an ‘Increasing’ option to a ‘Level’ premium payment option.
The single premium payment proves beneficial in this regard since the premium is invested for the entire policy term. This amount compounds to a sizeable pension corpus at the end of the term.
Added features that make the Aegon Religare Life Insurance plans attractive and add value to the investments:
Invest protect option: In this, the premiums paid would be channelized into Balanced fund for the whole tenure, save the last two years. In the 2nd last year of the policy, premium paid would be systematically shifted from Balanced fund into Conservative fund. In the last year, funds will be shifted to Debt fund. It gives an option to protect the portfolio from the market risk just before maturity.
Lifestyle option: In line with the Invest protect option available under the other plans of Aegon Religare, Lifestyle option provides an improvised version financial planning concept. Under this, the investor’s corpus allocation between debt and equity asset classes is pre-determined by a formula. According to it, “(80-Current Age of the investor)%” is invested in Pension Enhanced Equity and the balance is invested in Pension Debt fund. Thus, at the end of every year, there is a systematic transfer of funds from the Equity to debt fund thereby reducing the overall portfolio risk. In the last three policy years the funds are shifted from Enhanced Equity fund to Balanced to Debt to Secured fund. This option is available in all of Aegon Religare Life Insurance products.
Auto rebalancing: At the end of every policy year, the fund allocation chosen by the investor is reviewed and rebalanced to the original allocation level. This option is available in all of Aegon Religare Life Insurance products.
Conclusion:
Insuring one’s life is the first step to a prudent financial planning exercise. Investors may optimally choose from among the broad categories of insurance plans discussed above that are also potentially safer investment avenues, especially during turbulent times in the equity markets.