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What if you win an irregular income? If you keep an emergency fund with the cost of three months or do you need much more? If your child has special needs, you can afford to plan his life until he reached his twenties? How do you ensure the future of your child if you have no spouse to depend? What if your spouse ends its work and shrinking income from your family? None of these answers you can give advice over the mill. To overcome the financial difficulties that will arise in such a dilemma, you should review your financial strategy, just a little tweak or pinch will not be enough.

However, the first two canons of financial planning is applied in all circumstances, including situations above: the budget and be prepared. To create the foundation of any plan, you must understand that your cash flow and where the money goes. Once you understand this, you can begin designing a plan that will help fill the gaps and put their hard work. In the following pages, we tell you how to develop a strong and stable plan to help you achieve your goals.

BE AGGRESSIVE IF YOU ARE A SINGLE PARENT:
As you are solely responsible for the future of your child, you can buy coverage for large and invest more in stocks for higher yields.

The past 12 years, the Delhi based Inderpal Kaur is juggling his work at the airport operator and the responsibility of his daughter alone. Single-parent mother who is trying his best to satisfy all the needs of Ananyana 12 years. “I do not want to sacrifice the happiness of my daughter, or his future. So I bought a Ulip his name, I have to pay a monthly fee of Rs 2000,” said Kaur. Is this enough?

For most parents have a responsibility to ensure the financial future of their children is very high, especially since they do not have income from one spouse to fall back. Thus, their first priority must be to build an emergency fund. “You have to take six months of expenses in liquid assets to meet any requirement. Once this is achieved, begin to invest in assets, over time and the risk profile, “said Naresh Pachisia, a financial planner based in Kolkata.

Source: [ET]

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Unit-linked insurance plans (Ulips) have gained enormous popularity in life insurance segment in the current decade. According to statistics, the total new business premium generated from Ulip sales for the year ended March 2009 was Rs447 billion, or 55% of total new business, as per reports of the Insurance Regulatory and Development Authority (Irda). This has grown to about Rs60,000 crore in the latest year. Private life companies generate over 90% of their business from single and regular premium Ulips.

Irda has brought vast changes concerning Ulips since June’10 forcing life insurance companies to completely rework their Ulip strategies. Since September’10, Insurance companies have been required to re-launch their Ulips.

Reasons for regulatory changes

Three main reasons for application of several restrictions on Ulips:

1. Due to the tax benefits discussed above customers have bought Ulips as short-term investment without serious intention to continue the policy until the final maturity date.

According to Irda, the lapse rate on Ulips was 26% in FY06 (which continued to increase), and the 13-month persistency level of Ulips has significantly trailed the traditional plans. The low level of life cover embedded in Ulips and the ease of exit had contributed to an unhealthy growth in lapsation.

1. The regulator considered that the low persistency has been encouraged by the insurers because they gained from surrender charges, which have been as high as 70-90%. Thus the “profits” earned by shareholders from the surrender charges have fuelled aggressive distribution of Ulips, forming a vicious circle.
2. Ulip distributors have not made honest effort to develop a long-term relationship with customers or make a needs-based analysis of their insurance needs. This has not made customers recognize that insurance policy is an instrument of long-term protection and growth.

In August’09, the securities market regulator issued a directive requiring asset management companies not to deduct any distribution and other charges from the investment amount of customers on mutual fund schemes with a view to encouraging retail participation. This “no entry load structure” has led to a drastic reduction in the commission earning of mutual fund distributors, thus these agents promoted sale of Ulips which fetched attractive commission.

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What ensued was not-so-pleasant exchange of words from both sides in full public and media glare.

Sitting on the fence helplessly watching a duel that was supposed to decide their fate, investors had started getting restless rushing to their respective insurers asking all short of questions.

However, in the end sanity prevailed and so did IRDA over SEBI. But in a trade-off of sorts, IRDA had to bring in changes in the way ULIPs were being regulated. These changes were indeed to have far-reaching implications on the way they were being devised and sold to millions of customers.

Here is a look at the major changes that have been made and the impact they are likely to have on investors:

1) Lock-in increased from three years to five years.

Underlining the long-term nature of ULIPs, IRDA increased the lock-in period from three years to five years.  This would make policy holders stay invested for a longer duration– at least five years, thus benefitting from higher compounding effect.

This will curb the practice of insurance agent luring short-term investor into ULIPs, which are not mean for them.

As for insurance companies, it could reduce their lapsation rate. Since the fund managers at insurance companies would have investors’ money for a longer duration, they would be able to allocate the money in a better way and earn better returns.

2) Minimum insurance cover in ULIPs other than pension and annuity products doubled from five to 10 times the annual premium.

ULIPs have long been held responsible for spreading ‘Kam Insurance Lene Ki Bimari’. ULIPs being an insurance product are supposed to offer adequate protection to policy holders. However, insurance companies have always pitched them more as savings plans than as insurance products. To curb this practice, the regulator increased the minimum insurance cover or death benefit being provided through ULIPs.

To make it simple, let’s assume a policy holder pays Rs 50,000 as annual premium, then as per the new regulations the insurer has to provide a minimum death benefit of Rs 5 lakh. That’s the bare minimum, the policy holder can chose higher death benefits as well. Some insurance companies provide death benefits 50-100 times the annual premium.

However with higher cover, mortality charges (fee for getting cover) would increase and hence less money would be available for investment.

For insurance companies, offering higher cover means increased capital requirement. Insurance companies are required to maintain a minimum capital of 150 per cent of total sum assured.

3) All charges to be distributed uniformly over the lock-in period.

Earlier, up to 40-50 per cent (in some cases 100 per cent) of the first-year premium is deducted as allocation charges, leaving very little money for investment in the first year. Now, with charges to be uniformly distributed over five years, a larger portion of the first-year premium will be available for investment. With larger amount available for investment in the first year, investors will get better returns due to the compounding effect.

Another benefit of the move is that agents will now have to service policy holders for a longer period as they will receive their commissions in stages rather than upfront.

For insurers, this means they will have to maintain a high level of persistency to recover the cost incurred in the scheme’s initial period. Usually, the cost incurred in the first year is high. Now, with uniform distribution of charges, companies will have to recover that cost over a longer period.

4) A minimum annual guaranteed return on pension or annuity plans.

Earlier, unit-linked pension plans did not offer guaranteed returns and most of these products used to have large equity exposure so that returns at the end of the tenure of the policy are healthy. However, with the guaranteed return clause, all these are set to change forever.

As per the new regulations, IRDA would specify the guaranteed rate of return (ranging from 3-6 per cent) from time to time. At present, IRDA has kept the arte at 4.5 per cent.

As a result of this clause, insurance companies would be forced to reduce the equity exposure of pension plans, thus making them less attractive for younger investors.

From investors’ viewpoint, while their fear of losing money due to market risks would be completely eliminated, returns from these schemes would come down. For insurance companies, this ruling would mean greater capital requirements and added financial burden.

5) The net reduction in yield for ULIPs should not be more than 3 per cent at maturity

Fees charged for ULIPs (especially the allocation charges) were considered too high, making them the most expensive investment products. IRDA sought to address this issue by capping the difference between gross and net yield at 3(%) per cent for policies with tenure less than or equal to 10 years, and 2.25(%) per cent for policies with maturity over 10 years. It necessarily means that the expenses/charges should not go beyond 3(%) per cent of the maturity value of the policy.

Investors stand to gain as returns/yields are set to improve.

However, insurance companies’ profit margins could decline. Their ability to pay commission to distributors would also get hindered.

6) Standardised surrender charges

Surrender charges are deducted from the fund value if the one stops paying premium during the lock-in period. They are usually expressed in percentage of the total fund value at the time of lapsation of the policy. Earlier, there were no standardised rates for deducting surrender charges and within the life insurance industry, they varied widely.

To put an end to the arbitrary nature of the charges, IRDA came out with a standardised rate chart to be followed by insurer while charging surrender fee.

The maximum surrender fee to be charged if the policy lapses within a year is 12.5(%) per cent for a policy with maturity less than 10 years, and 15(%) per cent with maturity of over 10 years. Subsequently, for the following years the rate drops by 2.5(%) per cent. (See table below)

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The Insurance Regulatory Authority of India (IRDA) has issued the new guidelines for unit linked insurance plans (Ulips) which will take effect from 1^st September, 2010.

The regulator has increased the lock-in period for such products from the existing three years to five years.

According to the new guidelines, all Ulips other than pension and annuity products should provide a minimum mortality cover or health cover.

The details of the guidelines as stated are as follows:

GUIDANCE NOTES ON RECENT REGULATORY CHANGES RELATED TO UNIT LINKED INSURANCE PRODUCTS (ULIPs)

INTRODUCTION:

IRDA has, from time to time, taken various initiatives for protecting the interests of policyholders by bringing out Regulations, Guidelines, Circulars etc applicable to insurers and intermediaries covering the various stages in the lifecycle of an insurance product, commencing from solicitation, sale, policy servicing, to claims servicing and grievance redressal.

With expansion of the insurance sector and more and more innovative insurance products, in particular the Unit Linked Insurance Products coming into the life insurance market, IRDA has been sensitive to the changing scenario and the challenges that go with it. In particular, IRDA has been conscious of how these changes have been impacting the policyholder and has taken several steps to bring in changes in the regulatory framework to address various concerns of the policyholder.

IRDA had stipulated that insurers must provide the prospect/policyholder all relevant information regarding amounts deducted towards various charges for each policy year so that the prospect could take an informed decision. Insurers were required to provide Benefit Illustrations giving two scenarios of interest rates, 6% and 10% respectively. The prospect was required to sign on the illustration while signing the proposal form. This was done to ensure transparency and proper disclosures by the insurers.

It is necessary to demystify complex products and ensure that proper product disclosures are made to the prospect/policyholder. Towards this end, IRDA has already come out with an exposure draft on need to issue Key Features Documents. Responses received by the Authority are under examination and the initiative will be taken forward further. Similarly, Needs Analysis is another initiative identified by IRDA as a step in curbing wrong advice and mis-selling. An exposure draft on this requirement is already circulated and responses are coming in.  Whilst on mis-selling, IRDA has identified Distance Marketing as yet another area of concern and draft guidelines in this regard have been put up as an exposure note for all stakeholders to respond to.

Mention must be made of what is perhaps the most important step that the Authority has taken keeping in view the interests of policyholders. IRDA set up an exclusive Consumer Affairs Department that focuses on consumer related issues and initiatives including grievance redressal and consumer education through Insurance Awareness Campaigns. With a view to creating a central repository of industry-wide insurance grievance data and facilitating monitoring of disposal of grievances by insurers, IRDA is on the verge of implementing the Integrated Grievance Management System (IGMS). IGMS will not only help monitor the redress systems of insurers but also create a gateway for policyholders to register complaints with insurance companies first and if need be escalate them to the IRDA Grievance Cells. The Consumer Affairs department goes beyond facilitation and works towards taking grievances to their logical end by calling for explanations where required, carrying out enquiries and inspections etc. It is proposed to make the institution of the Insurance Ombudsman handle all types of complaints including those relating to policy sale and servicing rather than just restricting it to claims. IRDA is also shortly making its Call Centre operational for policyholders to lodge their grievances and also seek their status over phone/e-mail.

Further, keeping in view the need for efficient functioning of the insurance sector for protecting the interests of policyholders, it is necessary to have reliable, timely and accurate data relating to insurance. In order to ensure that proper data is collected, processed and disseminated in the manner required, IRDA has set up an independent body, namely the Insurance Information Bureau (IIB). The IIB has started functioning and has already made good progress.

RECENT REGULATORY INITIATIVES

More recently, IRDA has taken a holistic view of the features of ULIPs and addressed issues impacting the policyholders including the way such products are sold/bought; how ULIPs can be better financial instruments for providing risk coverage; how sale by unlicensed personnel and several other malpractices existing in this market may be curbed by plugging legal loopholes and tightening of the regulatory ambit; legal mandate to initiate direct penal action against Corporate Agents etc. IRDA therefore initiated exposure drafts covering these areas and received considerable feedback from various stakeholders on the issues put forth. The issues were then presented to and discussed with the members of the Insurance Advisory Committee as well as the members of the Board of the Authority. The following regulatory initiatives have been approved by the Authority during the Board meeting on 31.05.10.

I. Distribution channel related changes:

1.      IRDA has amended the IRDA (Insurance Advertisements and Disclosure) Regulations to remove any scope for the involvement of unlicensed personnel/entities in the sale of insurance products.

2.      IRDA has amended the IRDA (Licensing of Corporate Agents) Regulations to further tighten the Code of Conduct of corporate agents to ensure that the prospect does not deal with any unlicensed person. The Regulations have also been amended to ensure that there is no scope for any kind of remuneration other than commission where sale has been affected. This measure will reduce the expenses of the insurer, thereby lowering premiums to be paid by the policyholder.

3.      Regulations for referrals: IRDA has also addressed the issue of Referrals by bringing out separate Regulations leaving no scope for misuse of the system.  Companies which wish to share their database of customers with insurers would need to get approval from IRDA after having conformed to the requirements as laid down in the Regulations. Further, there are restrictions on the business activities of the referral company to ensure that there is no misuse of the system. For instance, the referral company shall not be in any business of extending loans and advances or accepting deposits etc though there are exceptions such as for Regional Rural Banks, Co-operative banks etc. The Regulations cast obligations on the referral company as well as the insurer including submission of data as and when called for by the Authority.

II. ULIP STRUCTURE RELATED CHANGES:

(1)  Lock in period increased to five years:

IRDA has increased the lock-in period for all Unit Linked Products from three years to five years, including top-up premiums, thereby making them long term financial instruments which basically provide risk protection.

(2) Level Paying Premiums:

Further, all regular premium /limited premium ULIPs shall have uniform/level paying premiums. Any additional payments shall be treated as single premium for the purpose of insurance cover.

(3). Even Distribution of Charges:

Charges on ULIPs are mandated to be evenly distributed during the lock in period, to ensure that high front ending of expenses is eliminated.

(4). Minimum Premium Paying Term Of Five Years:

All limited premium unit linked insurance products, other than single premium products shall have premium paying term of at least five years.

(5). Increase In Risk Component:

Further, all unit linked products, other than pension and annuity products shall provide a mortality cover or a health cover thereby increasing the risk cover component in such products.

(i) The minimum mortality cover should be as follows:

(In case of whole life contracts, term (T) shall be taken as 70 minus age at entry)

(ii)The minimum health cover per annum should be as follows:

(6). MINIMUM GUARANTEED RETURN FOR PENSION PRODUCTS:

As regards pension products, all ULIP pension/annuity products shall offer a minimum guaranteed return of 4.5% per annum or as specified by IRDA from time to time. This will protect the life time savings for the pensioners, from any adverse fluctuations at the time of maturity.

(7). RATIONALISATION OF CAP ON CHARGES:

With a view to smoothening the cap on charges, the capping been rationalized to ensure that the difference in yield is capped from the 5^th year onwards. This will not only reduce the overall charges on these products, but also smoothen the charge structure for the policyholder.

III. DISCONTINUANCE OF CHARGES:

IRDA has also addressed the issue of discontinuance of charges for surrender of ULIPs. The IRDA (Treatment of Discontinued Linked Insurance Policies) Regulations brought out by IRDA in this regard ensure that policyholders do not get overcharged when they wish to discontinue their policies for any emergency cash requirement. The Regulations stipulate that an insurer shall recover only the incurred acquisition costs in the event of discontinuance of policy and that these charges are not excessive.  The discontinuance charges have been capped both as percentage of fund value and premium and also in absolute value. The Regulations also clearly define the Grace Period for different modes of premium payment. Upon discontinuance of a policy, a policyholder shall be entitled to exercise an option of either reviving the policy or completely withdrawing from the policy without any risk cover. Further, the regulations also enable IRDA to order refund of discontinuance charges in case they are found excessive on enquiry.

These regulations are applicable to all new ULIP products approved by IRDA after these regulations are notified.

PLEASE NOTE: The above details are taken from the IRDA website. For a copy of the circular issued to the CEO’s of all the Insurance Companies Please click on the link below

http://www.irdaindia.org/ulips/CIRCULAR_ULIP%2028062010.pdf

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Finance Minister Mr. Pranab Mukherjee has said that the long drawn battle over Ulips – unit-linked insurance plans will resolve soon.

He even said that “general insurance still needs to work harder” although life insurance industry has made decent progress in reaching the semi-urban and rural areas.
To quote him on Ulips, ”We will resolve this issue soon. I understand the IRDA has taken some very positive steps in respect of regulations of Ulips which are in the interest of both the insurance industry as also the policyholders”.

So it is a surety that this tussle over Ulips will make it a better product for all the ULIP seeker.

And we at www.bimadeals.com will make the process of obtaining an insurance policy smoother and hassle free. Because we believe that Insurance is “By choice and not by chance”.

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Till date only, policyholder only received benefit illustration with the policy which shows the returns that they might expect at maturity. But now IRDA’s move would depict the type of the policy, minimum surrender value, and list of complaint centers, benefits of the policy as well as benefits not payable, among others in the open.

This planned document will show the risks concerned for the policyholder and the obligations or commitments required of him/her. The ulips controversy brought forth several complaints of unscrupulous agents selling regular premium policies (where commissions are higher) positioning them as single-premium plans.

To quote IRDA communiqué to all the life insurers :“A key feature document should not be too long as to lose the accuracy nor should it be too short thereby missing out on key facts. The document should avoid jargon, should be easy to read and most of all be attractive for the consumer to peruse. It should be titled prominently and should use easy-to-know language”.

Current scenario:
Buyers go through the life insurance policy—a contract document that is filled with legalese to understand the features of the policy. Outside India, especially UK, Regulators are instructing insurers to simplify the policy documents for easy comprehension by the prospective policyholders. Similarly, IRDA has approached insurers to draft policy documents in an easy-to-understand language.

The circular said, “It is observed that insurance policy documents are long and run into several pages, making it almost impossible for policyholders to read them. Contractual documents developed by insurance companies should take care of the interests of policyholders by giving them the required information in a clear and simple manner”.

The need for simplification: Even for an educated person understanding the legalities and the complexities of the key-features document is quite a task. To ensure that insurance companies do not work around these regulations and issue the key-features document in fine print, Irda has also prescribed the minimum font size for the document and provided a model document.

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This article will shed light on why this mess is taking so long to sort out and where it status. Under usual circumstance, in the absence of a super regulator, the government, probably the finance ministry or the law ministry should have mediated and modificate the respective Acts. But this issue is very technical in nature so, the government should have appointed experts to demarcate the jurisdiction in clear-cut terms, and then amended the statutes.
Thus the government’s decision to direct the two regulators to approach a court to sort the matter is not right. The courts give decision on the basis of an existing statute only.

Perusal of Section 11 of the Sebi Act, 1992, & Section 14 of the Irda Act, 1999 shows:

1. There is no overlapping of jurisdictions of the two regulators and,
2. There is no explicit statutory reference to Ulips.

So there is need to see how the jurisdictions of the two regulators become applicable to Ulips.
Ulips are insurance contracts between an insurer and a policy holder, whereby the insurer agrees to transfer the risk (of death of the life assured) from the policy holder to itself in return for the payment of a specified premium”.

Components of premium paid:

A risk premium which is the price of risk transfer and an investment component which the insurer invests in specified securities on behalf of the policy holder.
The investment component of the premium and the corpus that it accumulates into are intrinsic parts of the insurance contract and cannot be treated as a separate investment, for two reasons:

• One, the insurer has claim over the corpus in terms of actuarial valuation of the corpus and,
• The insurer may protect the payment of premium itself against the death of the life assured, in case the policy holder has opted for a “waiver of premium” rider.

Thus the investment component in a Ulip is an integral part of the insurance contract, and its existence does not change the nature of the contract.
But the investment component helps the insurer transact in the security market for which the insurer needs to abide by all the norms that govern the securities market.

Presently all insurers abide by these norms for the front end of the transactions but for the back end of the transactions, that is fund management, remains outside the purview of the securities market regulator – the area which should have come under the purview of Sebi, but is not at present.

The other option according to experts/analysts is to transfer fund management to professional portfolio managers like mutual funds, as done in the case of the New Pension Scheme.
But as every coin has two sides – there are two reasoning:

1. The core competency of insurers is personal risk management, not portfolio management and,
2. Such an arrangement will remove any conflict between Irda and Sebi.

Irda will regulate the Ulips as insurance contracts and Sebi will regulate the fund management done by the portfolio managers for insurers. This solution will workout best for the policyholder as they would get the best of both the worlds—Irda will protect their interests as a policyholder and Sebi will protect their interests as an investor.

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The petition filed in the court has no direct mention of the jurisdiction issue. Thus IRDA chief is unsure if SC will decide for the same.

Earlier, Sebi had filed a petition in the Supreme Court seeking transferring all the Ulip-related cases from various high courts to the apex court following which the SC had issued notices to the Centre, Irda and 14 life insurers.

Just in case you are new to the Ulip controversy, here is a quick re-cap:

SEBI and IRDA have been arguing about who has the power to regulate Ulips which happens to be equity and bond-linked insurance products.

Fight over regulation escalated on 9^th April when SEBI banned 14 life insurers (excluding state-owned LIC) from raising any fresh money from Ulips unless they are registered with SEBI.

To this IRDA asked insurance companies to ignore the order and continue their business as usual.

When SEBI would have issued the directive to LIC and few other insurers, the finance ministry had to intervene and got the status quo restored. FinMin also asked them to jointly resolve the matter in court.

Thus Sebi allowed insurers to raise money from existing Ulips, but prevented them from issuing fresh Ulips after 9^th April

Based on information collected from various sources, Irda wanted a joint application under Section 90 of the civil procedure code, but Sebi did not agree. Under Section 90 if any person agrees in writing to state a case for the opinion of the court, then the court shall try and determine the same in the manner prescribed.

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These provisions are applicable to all unit linked products (existing and new) with effect from 1^st February 2009.

Following are the list of provisions to be ensured by the insurers:

• Life Insurance Companies have to conform to the proposed format (attached below) which will provide complete details of the charges to be paid and amount that will be available for investment each policy year.
• Information specific to the particular policyholder should be used.
• Insurers need to give figures about the guaranteed benefits as well as non-guaranteed benefits for each year with regards to interest rates by the Life Insurance Council’s circular. Currently, interest rates used for benefit illustration are 6% and 10%. (The table attached below is used).
• The policyholder has to sign the tables with person selling on the day when he/she signs the proposal form. The tables will be part of the policy document and thus a copy has to be sent to the holder along with the policy document.

PS: Information obtained from IRDA site.

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They usually file new products mid year which gives ample time to market the product. The corporation has seen exceptional sales in April 2010 with premium from new policies growing 97% Year on year.

They target to cover 10 crore lives this year against 6.5 crore in FY10, which includes coverage under group schemes.

LIC discontinued its endowment plan – Wealth Plus and is closing another pension plan – Market Plus in next month end. So to keep sufficient variety of products in the market they plan to float new schemes soon.
Incidentally, LIC is not among the 14 life insurance companies which have been asked to stop selling Ulips by Sebi. Also, LIC is in a unique position that every policy sold by the corporation is guaranteed by the government under the LIC Act, 1956.

Mr. Vijayan said, “We are not affected by the guidelines on surrender charges as we never had these charges on Ulips. We believe that funds belong to the policyholder and should be credited to his account”.

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