NATURE OF LIFE INSURANCE PRODUCTS IS SUCH THAT THEY DEAL WITH BOTH INVESTMENT & PROTECTION

Last couple of months, Ulips have garnered a lot of attention in the media. The matter of jurisdiction is now in Supreme Court. Let me try to describe what the issue is about Ulips and how I see the entire debate. Lots of people are alleging that Ulips have very low (less than 3-4%) insurance element and that the government should specify a minimum percentage of the overall premium towards insurance cover. Though this sounds quite simple, its impact is enormous. If this percentage is mandated to, say, 7.5-10%, then life cover will have to be very high.

For certain age groups and income level, we might not be in a position to give such a high cover and Ulip sale will go down. Any prescribed percentage can only be calculated at the end of the tenor; that is when all payments have come in. Depending on the product and the tenor, the proportion of investment against the premium realised in a year will almost certainly vary year to year; though in the end, the sum total investment may be as prescribed. This could just kill the insurance industry.

Let me put forth few arguments as to why this whole idea about life insurance is 'about insurance and not investment' is not based on either logic or practice. Life insurance deals with accumulation and de-accumulation of money. Let us cover the accumulation products first. Life insurance is essentially bought with a certain purpose. For example, education of child, marriage of children, compensation in case of any serious ailment, pay loan in case of death, etc. The element of long-term savings entails that the customer has to be disciplined in paying regular premium over a period of time. The products are designed with a minimum lockin period, higher benefits as policy period keeps increasing. Thus the liquidity in the product is less compared to other financial assets like fixed deposit, mutual fund, etc.

Thus life insurance has always been about savings and protection. Under traditional endowment policies, the entire concept is based on how much money would a customer want either in case of death or at maturity. In case of money-back policies, this gets further refined, i.e., every five years some percentage of the amount is paid. This is basically not known to customers as they never see the element of insurance cost, expenses, savings amount and investment return separately.

The nature of assuming a certain investment return in product design over a longer period makes it necessary that the assumption about return is conservative. As stock markets started gaining importance, it was felt that life insurance customers would be better off if the money was invested in equity or other asset classes as returns are better. Thus Ulips were born where insurance companies unbundled all features like expenses, insurance cover, charges, etc, and clearly show what the amount is available each year for investment. This amount can then be invested in any financial asset, according to the choice of customer.

Over a period of time, life insurance companies came out with Ulips with minimum guarantee and some upside linked with stock indices. These are not available in the Indian market as insurance companies can't hedge their portfolio. Thus Ulips in this way are no different than traditional policies.

When we talk about de-accumulation products, these came into force when people started living longer after retirement. There was a need felt for products where a lumpsum money was given in lieu of monthly income for life or a certain period. These products by very nature are completely investment oriented. These products form the bulk of life insurance sales in developed markets. In India, these products have now started becoming popular.

Thus the nature of life insurance products is such that they deal with investment and protection. This proportion varies according to the product and the age of the customer. No other financial product is available in the market which is long-term in nature. In certain markets like Japan and South Korea, even personal insurance products of general insurance companies such as PA, household, etc, have savings element built into them. Thus, in certain countries which have a culture of higher savings, people don't prefer to buy pure risks products at all. People might find it strange to know that till 2001 we didn't have pure term products in our country at all!

Life insurance has truly penetrated all parts of the country with wide distribution network. Hardly 20% of the policies come from top 10 cities. This is against mutual funds which get 80% of the business from top 10 cities. Similarly, the average premium per life insurance policy will be less than half of what it is for mutual funds. Thus life insurance plays a very big role in taking the protection and investment option to customers in the lower income level.

Source: http://epaper.timesofindia.com/