The area under consideration today is availability of insurance along with mutual funds; and this is likely to remain in the spotlight because of huge attention focused on the area. An investor needs to distinguish the position with respect to other mutual funds that he has experienced. In this entire issue, the question of collection of insurance premium is important and a small distinction can make all the difference.

Regulation In the existing position the mutual funds cannot collect insurance premium. This, according to many people, puts mutual funds at a disadvantage because unit linked insurance plans (ULIP) offer insurance as well as investment like mutual funds together.

There are schemes that still offer an insurance cover but comply with the main guideline. To understand this one has to look at the fine print of the entire issue.

Offering insurance Presently when a mutual fund offers insurance along with the investment in their specific schemes, the entire situation works in a different way Mutual funds that offer such insurance do not ask the investor to pay the premium.

This means that the funds are offering insurance but are not collecting premium and the later condition is the one that has to be complied with. Currently the funds enter into a tie up with the insurance companies to provide insurance and they pay the cost. This is not collected from the customer. This thus becomes affordable only for those funds that have a strong financial position and this is also the reason why such insurance is offered for specific types of investment.

Collecting premium This can be distinguished from the situation where a mutual fund house collects insurance premium from an individual. This is what has been demanded from several quarters to get the mutual funds back on a level playing field with other instruments in the market.

Once the fund houses start collecting premium, they are effectively giving both the benefits of insurance and investment at a single place and the character of the investment changes. Investors need to look at the fine print because it is this kind of small change that can lead to a different outcome. They need to understand what is happening and how they are getting affected in terms of the benefits received.

PREMIUM DIFFERENCE ¦ Insurance and investments are very popular offer ings in the market ¦ There is a demand for mutual funds to provide insur ance ¦ Currently mutual funds cannot col lect insurance pre mium ¦ So mutual funds offer free insurance to some investors ¦ This is different from a state where they offer insurance too and collect premium for the insurance

Cross posted on Personal Finance Blog

When equity markets were surging northwards, apart from equities and mutual funds, ULIPs (unit linked insurance plans) were also favourites with investors. For investors, it was another opportunity to ride the rising markets; while for the insurance advisors, ULIPs offered the opportunity to garner attractive commissions. It was a win-win situation for all, until markets changed directions.

Now with the markets falling, investors are seeing the value of their ULIP investments decline with each passing day. The higher expenses charged in the initial years are only adding to the agony. Both investors and insurance advisors are responsible for this scenario. Investors, for having made ill-informed investment decisions and advisors for having mis-sold ULIPs and/or failing to adequately educate investors.

The trouble is that there is no universal answer to this question. Investors who are invested for the long haul (10-15 years or thereabouts) in a well-managed ULIP with the intention of achieving a predetermined investment objective should continue to stay invested.

However, investors who got invested for the wrong reasons or in the wrong ULIP may have to consider making an exit after consulting with their advisors. Such investors would do well to explore all available options and also study the implications of making a premature exit, before making a decision.

Ranajoy Sengupta, a senior executive with a public sector firm, got a call from a tele marketer offering an investment plan in which he would need to put in a fixed sum every year for three years and get back double the amount after five years.

For a long time, Ranajoy had been wanting to secure his son’s higher education. He found the telemarketer’s proposal appealing and agreed to sign up for a scheme involving an annual subscription of Rs 50,000. He didn’t feel it necessary to learn more about the product.

Next followed the worry.

Ranajoy learnt that the product he bought was a unitlinked life insurance plan (Ulip) and he could not withdraw even part of his investment in the first three years.

Moreover, only a portion of his annual subscription would be invested.

The two-year payment holiday (the last two years during which Ranajoy won’t be required to invest anything) was also a half-truth because the agent didn’t tell him that an amount equivalent to his annual subscription of two years would be deducted from his accrued fund.

The accrued fund value after five years won’t be even equal to Rs 1.5 lakh that Ranajoy had paid in the first three years! The moral of the lesson is that one must beware when an agent comes up with such “novel” investment plans.

The telemarketer must be an insurance agent trying to sell a Ulip on a wrong pitch.

Read between lines Misselling of Ulips is rampant, despite several warnings by the Insurance Regulatory Authority of India.

Ulips are fairly new in the field of insurance — it was introduced in a big way five to six years back.

A sustained boom in the stock markets in the last five years prevented investors from reading the fineprints of the cost structure, risks involved and other critical features of the product.

Neither the insurance companies nor the agents help prospective policy buyers understand the cost benefits and the risk-return profile of Ulips.

The reasons are not far to seek. Companies push their Ulip schemes as investment products rather than as insurance products to gain a higher market share.

The sustained rise in equity prices helped in their sales pitch. Moreover, an insurance company needs to keep aside lesser capital as solvency margin if it has a higher proportion of Ulips in its product mix.

HDFC Standard Life launched its new product, the Unit Linked Wealth Maximiser Plus, a single premium investment cum protection plan, with a minimum premium of Rs 1 lakh. Wealth Maximiser Plus is a unique investment opportunity for customers with a choice of thoroughly researched and selected investments.

Check out the PDF file for other details and charges

Key Features:

• One time investment at the start of the policy
• Cover till the age of 99 years
• Regular loyalty units of 0.10% every year as long as the policy is not surrendered
• No medicals in case of eligibility, for applying through Short Medical Questionnaire (SMQ)
• Flexibility of investing in 5 funds — Money Plus Fund, Bond Opportunities Fund, Large-cap Fund, Mid-cap Fund, and Manager’s Fund.

On the occasion of the launch of Wealth Maximiser Plus, Deepak Satwalekar, MD & CEO, HDFC Standard Life said, “Wealth Maximiser Plus is the first unit-linked product in the Indian life insurance industry to offer the opportunity of investing in ‘Manager’s Fund’ — a fund that offers a dynamic exposure between other Equity and Debt-type funds.” The investment limits are follows:

• Money Plus: 0-5%
• Bond Opportunities Fund: 10-60%
• Large-cap Fund: 15-45%
• Mid-cap Fund: 15-45%

Customers may choose Manager’s Fund, if they would like the company’s investment manager to take decisions regarding reallocation between equity and debt funds while market conditions change. HDFC Standard Life’s Unit Linked Wealth Maximiser Plus will offer customers the opportunity to maximize returns by investing in 5 new funds, launched exclusively for this product.

Wealth Maximiser Plus allows people to choose the premium and the investment fund/funds. HDFC Standard Life then invests the specified premium, net of premium allocation charges in the chosen funds in the proportion specified by the customer. The accumulated value of the funds is received at the end of the policy term. In the event of unfortunate demise of the policyholder during the policy tenure, HDFC Standard Life will pay the greater of the Sum Assured (less all applicable withdrawals) and the total fund value to the family members of the policyholder.

Wealth Maximiser Plus is a single premium plan and is subject to appropriate tax treatment under the Income Tax Act 1961 and rules made there under or any other financial enactment prevailing from time to time. Currently Section 80C benefit is available for the premium paid into the plan subject to the limits in that section. Benefits received under Section 10 (10D) will be exempt from tax subject to the limits contained therein.

But the big question is: What are the charges? Premium allocation charges of HDFC ULIPs are known to be the highest!!