The life insurance industry has been a dynamic one since the entry of the private players into the insurance market. Customer focus and product innovation have taken centrestage, which, one has to say, has been a departure of sorts from the days gone by. Last year was no different for this sector; it saw a lot of activity in the year.
Budget changes
The most significant event of the year for the insurance sector was the increase in tax benefits on life insurance plans.
Earlier, the benefits on premium payments stood at Rs 70,000 for the year; these were brought within the consolidated Section 80C banner to Rs 100,000. This limit includes Section 80CCC pension plan tax benefits upto a maximum of Rs 10,000.
ULIPs form a major portion of new business
Unit-linked insurance plans (ULIPs) continued to rule the roost; taking off from where they had left last year. For many life insurance companies, ULIPs accounted for more than half of new business.
Mis-selling still continues
ULIPs have been aggressively marketed by life insurance companies. ULIPs as a product, has been a valuable addition for the insurance seeker. But many insurance agents have 'sold' ULIPs without really understanding the individual's needs, his risk profile or the fundamentals of asset allocation.
At Personalfn, we believe that equities are equipped to do better in the long run compared to their fixed return counterparts like bonds and G-secs. But at the same time, we also believe that individuals should make investments in ULIPs in tune with their risk profile and asset allocation.
Recently, the Insurance Regulatory and Development Authority has come out with certain guidelines for ULIPs. It has proposed a compulsory 3-year lock-in period for ULIPs.
In other words, individuals will not be allowed to withdraw any money from their ULIP 'account' for the first 3 years. The primary intention behind this is to preserve the identity of life insurance (and therefore ULIPs) as a long-term savings option.
The IRDA has also specified that the minimum tenure for ULIP policies be 5 years and that a ULIP have a 'sum assured' and not be totally linked to the markets. In addition, the IRDA has also proposed that life insurance agents be given separate training for selling ULIPs as ULIPs demanded better understanding than that currently prevalent in the industry.
The guidelines will be effective from June 2006. These guidelines by way of 'restructuring' the product, will help in protecting the interests of individuals and also go a long way in curbing the malpractices currently prevalent in the life insurance industry.
Term plans still not being 'sold'
Term plans are the purest form of life insurance available. Despite a term plan being a must in every individual's portfolio, they continue to remain poor cousins to savings based plans (life insurance with a maturity benefit).
Blame the many unscrupulous agents for this. Individuals need to ensure that their financial portfolio consists of a term plan, which will help the overall long-term financial planning cause.
Endowment plans still being 'bought'
Individuals continue to be 'enticed' by endowment plans for the maturity benefits and the 'safety' that they provide. While such plans do have an insurance element, the returns that they offer hardly manage to beat inflation, leave alone help individuals plan their finances effectively.
We do believe that from a long-term perspective, individuals need to look at other more efficient means of savings like tax saving mutual funds or ULIPs. However, as always, the same should be in line with their asset allocation and risk appetite.
Pension funds on the anvil?
The interest rate offered on EPF has been brought down from 9.50% to 8.50%. The EPF being long-term savings, the rate cut has made the need for the setting up of pension funds even more acute.
While the process of putting up the pension fund regulatory and development authority (PFRDA) has been initialised, the pace needs to pick up so that individuals can park their pension monies with a body, which will make their money work harder for them as compared to the earlier scenario.
Strategies for 2006
A term plan is life insurance in its purest form. Individuals should buy a term plan before considering other types of life insurance. This becomes necessary in light of the fact that such plans offer the much-needed insurance cover at a low cost.
Come June 2006 and ULIPs will emerge in a more transparent and unambiguous form due to the changes proposed by the IRDA. Having said that, insurance seekers on their part need to gain a better understanding of ULIPs and find out how well it fits into their financial planning exercise.
We could also see more options being introduced in the pension funds segment. This can give a boost to retirement planning and help individuals plan effectively for their retirement.
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