Life Insurance Needs Careful Planning, Focused Advice

Post liberalization in 2000, there has been tremendous growth in the Indian insurance industry, more particularly so in the life segment. The total life insurance premium underwritten by the industry has grown from Rs. 26,250 cr. in FY 99-00 to Rs. 286,500 cr. in FY 10-11. India has the largest in-force policies in the world and is among the world's Top 10 largest insurance markets by collected premium.

For the insurance sector, insurance penetration and insurance density are two important indications of its potential and performance. Total life insurance premium, which was just 1.4% of GDP in FY 99-00 before the industry opened up for private participation, has grown to 4.7% of GDP in FY 09-10, which is very healthy and comparable to many developed markets. The number of life insurance policies in force has also increased nearly 12 fold over the past decade.

However, while the premium figures have gone up, the level of protection cover that Indian customers have is very low as compared to other markets. In insurance parlance, sum assured is the amount payable to the beneficiary in case of death of the policy holder. This is the level of protection that a policy holder has. Now, the total life insurance sum assured in India as a multiple of its GDP is just 0.3 times Even in a small country like Taiwan, this figure stands at 2.3 times. Indians continue to remain extremely under-protected. We are just not adequately prepared for eventualities. This is despite the fact that the need for protection has continuously grown, whether it is about sustaining current lifestyle, paying off existing loans, or taking care of child's education, marriage, etc.

There are several categories of life insurance products which can help customers secure their families financially in case something was to happen to the breadwinner. There are Term plans that are purely focused on life protection. And there are Traditional plans or Unit Linked plans (ULIPs), etc., which are a mix of life protection and investment returns. In fact, life insurance plans are uniquely customizable solutions where customers can choose the protection level they need along with a choice of funds where there monies can be invested for an appropriate period as per their risk appetite and future needs. No other financial products offer this combination of protection with investment.

In the past, ULIPs were extremely popular with customers since they offered good investment returns, primarily from a booming stock market along with some very basic protection cover. The product structure lead to mis-selling around short term investment returns without customers adequately understanding the possible downside risks of investing in market linked products. However, post the regulatory changes towards the end of last year as also the continuous writing and debating around the product category by media, customers today have become slightly unsure of buying ULIPs. This is unfortunate since the new guidelines have made ULIPs more attractive for customers on both aspects of long term investment returns as well as life protection.

The new guidelines have strengthened the life protection component in ULIPs. The regulator (IRDA) has stipulated that the Sum Assured should be a minimum of 10 times the regular annual premium (125% of single premium) for customers' upto age 45, and 7 times (110% of single premium) for other customers. The cover may still not be enough, but a focus on enhancing protection cover for policy holders is definitely a step in the right direction. Continuous education around the importance of life protection will encourage customers to opt for a higher Sum Assured rather than just the mandatory cover ulip vs mutual fund.

Also, the value proposition on investment returns is also much stronger than what it was in the past. The cap in IRR and agents' commissions mean lower costs and better returns to the customers. In addition, lower surrender charges also works well for customers who may need to give up their policy without incurring financial losses.

In my opinion, ULIPs are now a much more attractive proposition, primarily on account of more focus on life protection, which is really the fundamental purpose of insurance. If you do decide to buy a ULIP, here are a few considerations that you must keep in mind.

Choose a ULIP with high protection cover. Remember that under-protection will impact financial security for your family in case of an eventuality.

For healthy returns on your investments, you must be ready to hold your ULIPs for a long tenure, at least 10 years.

Chose a fund(s) to invest in carefully, basis your risk appetite. Most ULIPs allow you to allocate your monies in multiple funds and also to periodically switch your monies between your various funds. Your choice of fund(s) will determine the returns and the safety of your investment. Review the fund performance on a periodic basis.

Go through the Key Features Document and Product illustration carefully to understand various charges and expected returns. It is mandatory for insurers to explicitly give information on the definitions of all the applicable charges, method of appropriation of these charges and the quantum of all the charges during the entire term of the policy. Insurers must also share a product sales illustration that highlight the rate of return calculated at 6% and 10% to enable comparison across various products.