Embedded value: Know the risks inherent in unit-linked insurance plans

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October 18, 2019 1:44 AM

Unit-linked insurance plans are stock market investments. Policyholders should understand when to switch funds to get good returns & highest safety

Embedded value, risk, unit linked insurance plan, ulip, Policyholder, money news, NAV, mutual fund,insurance, life insurance The policyholder has to be very alert while exercising options for different types of funds and he also needs to know when to switch funds for best return and highest safety.

When buying life insurance, people are generally not concerned with the movement of the stock market and do not look for earning very good returns on the premium. They think they should get reasonable return and the return must be certain. Traditionally, endowment policies have been fulfilling such expectations.

As awareness of the stock market grew, some people started demanding stock market-like returns on life insurance. In order to meet this demand, insurers introduced Unit Linked Insurance Plan (Ulip) in which the risk premium amount is maintained in the life fund, while the remaining amount is invested in the stock market as per the options exercised after deducting expenses as per Irdai norms. The fund is invested in the stock market as the mutual funds do and the NAV is declared daily for each fund. The risk in respect of each fund is borne by the policyholders.

Policyholders need to be alert
The policyholder has to be very alert while exercising options for different types of funds and he also needs to know when to switch funds for best return and highest safety. But the ground reality is that policyholders do not have enough expertise to get maximum benefit from their investments. There are all the chances of a good return but at the same time they stand to lose if their investments are eroded by declining market return.

When an agent talks to a prospective customer, he presents Ulip as an attractive product which can give him more return on maturity than the endowment plan. Both endowment and Ulip policies are meant for payment of maturity amount with reasonable growth. Ulip is affected by volatility in the market and the income depends largely on the skill of the fund manager. There are options such as debt, equity, or balanced fund but these issues are quite complex for an ordinary policyholder. If the intermediary tries to sell Ulip and shows only high returns to the prospective buyer, he does not respect the trust reposed in him by the client.

Agents must explain
The intermediary has to explain the nature of the funds and investment and tell the policyholder to track the NAV of his fund and take timely action. There have been several instances when Ulips have been sold to senior citizens on the basis of past record of return and they have lost their entire wealth due to falling markets.

Highest number of grievances received by life insurance companies are for misleading or insufficient information given to policyholders by the intermediaries. Moreover, those who buy Ulips are expected to stay invested by paying premium for a long time to take advantage of the cyclical ups and downs in the market.

The endowment policy return maybe lower but that return is guaranteed. The endowment policyholders get return, mostly reasonable return but that return is not get affected by the ups and downs in the market as the investments are mostly confined to sovereign bonds.

Market risks
The main issue today is whether Ulip is a deceptive or faulty product or whether it’s misunderstood and mis-sold. I think the latter is correct. Ulips should never be projected as a plan that multiplies money faster. It should be treated as a stock market investment exposed to all the risks that go along with the market.

This product had brought a bad name to the industry in the past. It is meant to serve a few and not everybody who wants to buy life insurance. Hence the life insurance marketing should focus more on term insurance or on the traditional endowment policies; the Ulip should be sold only to a few who can wait for their money to grow over a long period. For them, Ulip brings the advantage of stock market return on their premium and exemption from tax on the proceeds under Section 10 (10)D of Income Tax Act.

In the first 10 years since introduction of Ulip, a lot of mis-selling, mostly by private sector insurers, took place. Policyholders lost their savings in most of the cases. Heavy initial expenses deducted by insurers sometimes resulted in negative return to the policyholders. It is advisable to buy insurance plans according to one’s needs after fully understanding the terms and conditions. It is not necessary to combine insurance with investment.

The writer is former MD & CEO, Star Union Dai-ichi Life Insurance

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