How will the tussle over Ulips between Sebi and Irda affect investors?
People do not need to worry as both the regulators are working towards the same goal investors' benefit. Though there has been uncertainty over long-term policies, we witnessed a growth of 20-25 per cent in business, in April, which means there is a tremendous confidence in the insurance system. Even during the global financial crisis, investors did not discontinue their policies and some even bought new ones.
The commissions on insurance products are considered very high. Are we likely to have a no-load regime?
Commissions have been coming down gradually over the past few years. When the insurance sector was opened up, the total commission to total premium ratio was 1 per cent; now it is 6 per cent. With the recent capping of expenses, these charges are likely to go down further. The charges under Ulips are comparable with those paid by customers under the load-free structure of mutual funds. These have been capped at 2.25 per cent for policies that have a tenure of more than 10 years, and at 3 per cent for plans of up to 10 years. In fact, 47 per cent of the total new premiums collected last year came at a commission of less than 2 per cent; it was lower than the entry load for mutual funds at the time.
In the past 10 years, insurance companies have incurred huge costs in setting up their network of more than 12,000 branches and over 30 lakh agents. Also, 18 per cent of the new policies have to be sold in rural centres. All these factors impact the costs.
How important is the agent in the life insurance chain?
An insurance agent does more than the other financial intermediaries, which is why he needs to be compensated well. He is the primary underwriter. In more than half the policies, no medical examination takes place. Most of this is based on the agent's report on the financial and physical health of the insured and his understanding of the case. He looks after the policy for 10-15 years. In case of a death claim, he plays an active role in ensuring that the claim is settled.
The policy lapse ratio in the industry has been high. Does this imply that there is mis-selling?
Some people are not financially knowledgeable and depend on the agent for advice. So, there could be some mis-selling. The regulator has been trying to ensure that the insured person understands all the terms and conditions before buying a policy.
What should investors consider before buying a policy?
Insurance is meant for the long term, so don't exit a policy in the first five years. People who buy insurance as savings need to be clear about the stage at which they require the money, the period during which they will need the maximum risk coverage, etc. Customers should ensure that the declaration made while buying a policy is correct so that the family doesn't face any problems later on, especially during a death claim. If you need a large cover, buy two policies. So, if you find it difficult to pay the premiums later, you can discontinue one.
Source: Money Today.