Index-Linked Insurance Products could be seen as a category which fits in between traditional products such as Endowment plans and Ulips.
In ULIPs the transparency is higher but the investment risks are completely borne by the policyholders.
Index-Linked Insurance Products (ILIP) may soon be available to the buyers of life insurance policies in the country. The Insurance Regulatory and Development Authority of India (IRDAI) has received a report from the Working Group (WG) set up for the purpose of examining the need for index-linked products in India. Along with traditional insurance plans such as endowment and money-back plans and unit-linked insurance plans, you may get an option to buy Index-Linked Insurance plans in future.
The WG is of the view that there is relevance for Index-Linked Insurance Products which could be seen as a category which fits in between traditional products such as Endowment plans where features can appear less transparent and the unit-linked products (ULIP) where transparency is higher but the investment risks are completely borne by the policyholders.
The considered view of the WG was that ILIP could be seen as a suite of products wherein greater transparency can be facilitated to the customers with respect to product structure and benefits and where risks are in line with the choice made by the customers.
The WG therefore believes that ILIPs could be an apt alternative or complimentary option to the current conventional guaranteed products (including annuities and savings products) and ULIPs, particularly in the context of volatile investment markets /stressed interest rates.
The recommendations of WG are sub-divided from Variant 1 to Variant 3 for each product types, where Variant 1 product structures are the simplest and benefits are linked to a single simple/well understood/liquid index while the other Variants are more complex and benefits could be linked to multiple indices including equities.
The WG realized that the complex or high-level ILIP products can bring about more complexity and hence the recommended approach is to start with simple designs termed as Variants 1 in the report where indices are linked to simplest indices e.g., possibly fixed/GSec income-linked or Nifty 50 type indices, where indices are liquid and also popular and are well understood.
The working group recommends that under ULIPS a segregated fund may also be allowed to be offered as an option with an option to invest in assets confirming to a chosen index.
Considering the fund management charge (FMC) which is capped at 1.35 per cent in Ulips, the insurers can keep the FMC at considerably low level given their volume of business. Giving Ulip policyholders an option to invest in an index fund will help investors over the long term.