Every time you go out for shopping, you tend to look out for something new and different. It is quite natural to get attracted and enticed to buy different products with latest technology to make your daily lives less cumbersome. Well, this approach would work in such cases (of buying tangible goods) but when it comes to investment decisions, you ought to take extra care before you plunge into it; just because the product offered to you is different and has something new in store for you. You might land up buying a product which does not suit your needs or risk profile. Moreover you might incur heavy financial losses.
Similarly, when you buy insurance policy you need to act responsibly and make decision based on your requirements. It is quite possible that to lure policyholders into buying new products, the insurers come up with a different product in order to meet the sales target or new business premium targets.
At present, the Insurance Regulatory and Development Authority (IRDA) has brought out a draft guideline outlining the basic structure of Index Linked Insurance Products (ILIPs) a new category that is set to hit the life insurance market soon. ILIP is a new category of index-linked plans which will be promoted as an unbundled product i.e., it cannot be sold with any other financial product. The returns will be benchmarked to an index - to be approved by IRDA - which will allow the policyholder to get a guaranteed value. The IRDA has also suggested levying only mortality (risk cover) charges explicitly. Charges like those for surrender and withdrawal will remain implicit throughout the term of the policy. According to the draft regulations, an ILIP will operate more or less like a bank account, with each policyholder having a separately managed account. The account value will reflect the premium paid by the policyholder as well as the interest gained from the particular index to which the fund is linked. The account will also show the mortality charges deducted. Insurance companies will be required to send a statement of policy account to the policyholder at the end of every reporting period. Minimum death benefit under the new plan will be the same as in case of ULIPs, which is currently 10 times the life cover or sum assured.
The solvency margin - the total amount that an insurance company needs to put aside to meet future claims or redemptions by policyholders - requirements will also be in line with ULIPs. Currently, for non-guaranteed ULIPs, the solvency requirement stands at 0.8% of the total reserve or 0.2% of sum at risk. And products that come with upfront guarantees, like highest net asset value (NAV), should have a solvency requirement of 1.8% of the total reserve.
We are of the view that, policyholders should not rush in to buy a product similar to a ULIP, since in the past ULIPs have failed to provide adequate returns. Moreover, the sum assured or the life cover is too less to provide suitable protection to one’s life. And with the ILIPs, leaving besides the mortality charges all other charges like surrender and withdrawal charges will be implicit and the policyholder will come to know only when such events like a surrender or withdrawal from the policy takes place. This makes ILIP less transparent in terms of disclosure which is not in the best interests of policyholders.
Investors should never mix their investment needs with their insurance needs. In order to have adequate life cover, one should always go in for a pure term plan and avoid taking different variants of life insurance products. Also, while opting for a term insurance plan it is imperative to insure yourself with an optimal life cover, taking into account your human life value, thereby planning your insurance needs prudently.