SEPTEMBER 1, 2010 can truly be described as a watershed date for life insurance companies in India. It was on that day that the Insurance Regulatory and Development Authority's (Irda) new rules regarding various aspects of unit-linked insurance plans (Ulips) came into effect.
Quite expectedly, several insurance companies have adopted new strategies to align their business in line with the sweeping changes that have come into force. And 'cost control' and 'rationalisation' have become the new buzzwords in the life insurance industry today.
Eyeing Singles:
Some insurers have hit on single-premium plans as one of the ways of reducing costs. While most policies offer a single- premium option, last month saw the launch of a few single premium-focused unit-linked insurance plans (Ulips). Many see this as a cost-controlling measure, as single-premium policies eliminate the cost of pursuing as well as the risk of lapsation.
In case of regular premium policies, product pricing factors in a degree of lapsation. In comparison, single-premium products cannot lapse. Also, companies incur lower costs on servicing of single-premium policies compared to regular pay policy. The companies that have recently announced such policies include ICICI Prudential Life, ING Life and Bajaj Allianz Life. While the idea of total liberation from the chore of paying premiums at regular intervals seems tempting enough, you need to evaluate your current financial situation and future requirements before taking the decision. Here are some points you need to ponder upon:
The Upside…:
The obvious one is that for a one-time payment, your family gets a protection cover throughout the policy tenure, provided of course, you can afford the lump-sum payment. That is the reason why it is considered better suited for those with an unpredictable, seasonal or irregular income flow and beneficiaries of windfall gains. Such a bonanza could either be in the form of sales proceeds of a property, bonus or other payouts. Such customers may want to deploy funds on a one-time basis rather than commit to long-term regular investment. We see single premium policies as fulfilling the customer need of a single-time investment without the obligation to pay subsequent premiums. We believe this is a significant market. Regular premium policies, on the other hand, are targeted at regular, disciplined investors who intend to save money for realising long term financial goals like buying a house or planning for their retirement or their children's education.
Since all Ulip policies have a lock-in period of five years, policyholders who discontinue their renewal premium payments in regular term policies in the first five years, cannot retrieve their investments before the lock-in period. While the lock-in period is applicable to single premium policies too, there is no possibility of the funds getting locked in to a 'Discontinuance Fund' at a minimum guarantee of 3.5%, and the customer continues to enjoy the investment opportunities of his/her chosen fund and strategy as planned.
This apart, in a single-premium policy, the maximum commission is capped at 2% under the Insurance Act, 1938. This means the policyholder will have to shell out lower charges when compared to regular premium Ulips (even after their post-September 1 makeover). Also, as against a regular premium policy, single-premium ones do not entail a recurring policy administration charge over the long term.
Says Anil Rego, CEO of financial planning firm Right Horizons: This is also an interesting way of increasing one's life cover by lump-sum investment, if one is able to time the entry or exit (invest in debt fund when the market is at it peak and switch to equity when it troughs), one can make significant upside. Single premium also appeals to youngsters who are wary of long-term commitment and also to all categories of people with irregular income. Single premium plans could also be apt for individuals who want to gift their children or grand-children on important occasions, and non-resident Indians (NRIs) who want to repatriate part of their income back into the country.
…And The Downside:
If you are looking at directing your money to life insurance to save on taxes, this product may not necessarily fit the bill. According to financial planners, though Ulips have been extremely popular vehicles for making investments, life insurance should never be used as a tool for reducing your tax burden. Nonetheless, if you still want to put your money in Ulips in order to claim deductions under Section 80 C and have identified single premium plans for the purpose, you need to know you will be entitled to the benefit on the premium amount only up to 20% of the sum assured. Therefore, if you are paying a single premium of, say 50,000, and a sum assured of two times the amount, your cover will amount to 1 lakh. The amount of deduction, in this case, will be only 20,000, as it is restricted to 20% of the sum assured.
Single premium Ulips qualify as a good means of increasing your cover. However, if one were to look at the long-term perspective, if the fund growth fails to sustain mortality or fund management charges, there
could be considerable erosion of corpus built.
Regular premiums may work better for someone who has a long-term investment perspective.
Single premium Ulips are again a means of haphazard investing. They could lead to fragmentation of the portfolio, which will be tough to manage. Moreover, Ulips, including single-premium policies, come with a lock-in period of five years under the new guidelines. Should you require the money in the interim, you will not be able to encash the amount to fund your needs.
Remember, if you have a lump-sum to invest and protection cover is not what you are looking for, you can always explore other, more liquid, options like mutual funds (particularly by adopting the systematic transfer plan route), stocks and other investment avenues before finalising single premium plans.
THE SINGLE SHOT
Case for…
Eliminates the rigmarole of paying premium every year
Suited for those with irregular income who are not confident of servicing premium payments regularly
Windfall gains like bonus or sale proceeds from property can be directed to the single premium policy to enhance life cover
… And Against
Tax benefit on premium paid under section 80 C is available only up to 20% of the sum assured
Since Ulips, including single premium policies, come with a lock-in period of five years, you will not be able to withdraw the money during the period, should the need arise
If protection cover is not your objective, then evaluate other more liquid investment avenues like mutual funds and equities
