The Hindu Business Line : Back on the traditional path

Trendsetter: The equity market has been setting the trend for insurance offerings in the last few years, as evidenced by the mushrooming of guaranteed products.

Suresh Parthasarathy

Competition is believed to be the mother of innovations in the business world. But, at times, corrections in equity market too bring about changes.

Traditional insurance plans, which accounted for majority of the new business premium, were sidelined once ULIPs took centre stage during the bull phase of equity market. The equity market correction last year was an eye opener to insurance companies and policyholders. Insurers have now slowly started offering guaranteed products to attract new investors.

Taking cues from the trend, Max New York Life recently launched “Secure Dreams” – a guaranteed traditional plan. The scheme operates similar to a universal plan.

Universal life plan provides a customer the best of the both the world.

Universal life is a plan where premiums are deposited into one or more funds and charges for the insurance and other expenses are deducted from these funds. While the scheme launched byMax New York Life may not be a universal life plan in its true sense, it may be a beginning in the direction.

Secure Dreams is more of a traditional plan with the flexibility typically available in ULIPs. The premium is invested in debt instruments after deducting risk premium.

In regular traditional plans, the charges are not transparent and limited premium paying term is not possible. Secure Dreams has overcome this limitation. However, Secure Dreams is a non-participating plan, which implies that the policyholders will not be entitled to the share of surplus (profits) of the company.

Policyholders are eligible for guaranteed addition of at least 3.5 per cent per annum and the interest rate is declared ahead of every quarter. Policyholders are also entitled to loyalty addition of 10 per cent of annual premium for the last five years.

The scheme offers risk cover for 10 times the annual premium. The company technically pitches the product as a double sum assured product. In the event of death of the life insured, the sum insured is paid to the nominee and the remaining premium is funded by the insurance company until maturity. Another lump sum (again the sum assured) is paid along with the accruals on maturity.

The fund has also introduced some innovation in premium allocation charge (PAC). Instead of charging PAC on the entire premium paid, it has fixed the charge for the first Rs 50,000 at 30 per cent; the balance premium will not suffer any charge. From the second year the policy will not attract any PAC.

However, the policy administration charges appear to be on the higher side for the first three years and works out to 15 per cent of the annual premium. From the fourth year the charge is fixed at maximum of Rs 150 a month.

This policy may be the first of its kind among the traditional policy (endowment nature) genre to facilitate partial withdrawal by the policyholder. The first six withdrawals in a year are allowed without any charge. But subsequent withdrawals will attract charges.

With insurance industry maturing in India, investors can look forward to some innovative products in the years to come.

Comment

To achieve one’s financial goals it is mandatory to have an insurance cover equal to the targeted value of goal.

For individuals in the highest tax bracket, their post-tax earnings of any fixed debt instruments (that are offering 8 per cent return) will be closer to the yield achieved by the insurance investment. Hence individuals willing to compromise returns to protect the goals can consider investment in such plans.

However, for those in the lower income bracket, given the low yield from these products, this cannot be the only option to build wealth as the plans may not always beat inflation.

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