Are ULIPs investor friendly?

Unit-linked insurance plans or ULIPs as they are popularly known as are another form of life insurance. Sumeet Vaid of Freedom Financial Planners and Kamesh Goyal, CEO, Bajaj Allianz spoke to CNBC-TV18 about ULIPs and what the trend is.

Goyal says that, today ULIPs have become very customer centric and friendly, where the focal point of the business is slowly gyrating towards traditional policies. He finds, however, a reduction in the sale of ULIPs a cause for concern due to the margins of the distributors falling dramatically. �While regular premium products are down by 30%, ULIP premium collection is likely to have dropped by 50%.� Vaid echoes Goyal�s words saying that ULIP sales have fallen substantially. �They need to be positioned as a long-term product.� Below is a verbatim transcript of their interview with CNBC-TV18�s Mitali Mukherjee and Sonia Shenoy. For the complete interview watch the accompanying video. Q: Ever since the new changes which came in, courtesy the EBI, has there been any increase in ULIPs as a product because they are actually friendly now for retail investors? Goyal: I would not say that the changes came, courtesy the SEBI. I would say that the changes came, courtesy the IRDA. We have to keep two-three things in mind. One is that the product has become extremely customer friendly but because the margins for the distributors has been reduced dramatically. Also the fact that the market has been a bit more volatile in the last four-five months, we are seeing lesser interest in ULIPs on the regular premium side. In the last four months, we have seen the business shifting more towards single premium and within regular premium shifting more towards traditionally policies. This actually in my opinion is a bit sad that when the product has become good and when the valuations in the market are lower than where they were about in October-November, we are seeing a reduction in the sale of ULIPs. Q: One reason perhaps for the reduction of the ULIPs scheme is because of the resistance to change that many of these investors have had. With these new ULIP guidelines coming out, many investors have been quite wary which talks about a lock-in period increase in three-five years, ULIP pension products that don�t have any partial withdrawal etc. How would you really address these problems for now for an average investor? Vaid: The challenge is not at the investors end as much at the distributors end and that is where the whole industry challenge is, where the financial advisors are being known as distributors. Till the time financial advisors are not advisors but are distributors, they will always try and see a product from a pricing point of view. From a Freedom Financial Planning point of view, we are very happy with these changes and the way we are articulating in our financial plans. We are seeing traction of ULIPs coming up. The real challenge out here is to educate an investor on the importance of doing financial planning and within financial planning, articulating financial goals and attaching long-term products like ULIP which has some inherent advantage. If you follow this process, you will see it getting acceptance. It�s more of a distribution challenge to me rather than an investor acceptance challenge because if it is properly positioned they are very open to it. Q: What are the numbers looking like in terms of the demand for ULIP? How much premium has it been able to mop up in Q4, considering most of the demand comes in now? Vaid: I am not an industry expert from a number point of view but definitely the numbers are not as good as it was last time. Again, the relevance being it is not being pushed that much by distributors as much as an endowment plan is being pushed up. If you can articulate the importance of ULIP over a long period of time with some embedded benefits like asset allocation which investors are buying especially with financial planners like ours. Q: Any confusion right now on the tax benefits with ULIPs because that has also tended to be a bit of an overhang in the last few months? Vaid: The confusion is overall there in the air, especially, with the Direct Tax Code (DTC) coming in. The way we see ULIP is that one of the biggest advantages for ULIP is when you do a progressive asset allocation. Let us say you are planning retirement and as you move towards your retirement age, you can easily allocate between debt and equity and keep changing without having a tax impact as of today�s tax laws. What most of us don�t know is post DTC what will be the treatment? Yes, there is an overhang of confusion but that confusion is in all tax saving instruments. We cannot be very sure of what is going to be next year and the year after that from a tax treatment point of view. As of today, clarity post the new IRDA norms is much more than what was there earlier keeping DTC aside. Q: What do you think the collections might look like this year from the ULIP product and how long before this distribution issue is sorted out? It�s been a year and a half now that the industry has been suffering on that end? Goyal: If we really look at it, on ULIPs the real mobilization was happening through regular premium and if we see the industry figures for the last four months or so, the regular premium, overall, is down by about 30% or so. As of now the bifurcation has not been published, but my sense is if we compare the last three-four months figures of last year with this year, the collections of ULIPs would actually be down by more than 50%. Whenever this debate about distributor�s margin and agency commissions etc come up, people always push for a lower cost because they feel that it�s better for the customer. In the last one year, I have always been advocating that though the cost of ULIPs had to be brought down, but if you bring it down too much, then you actually have an exceptional product, which nobody wants to sell. _PAGEBREAK_ In case of ULIPs, unfortunately, that is what has happened. We need to see things now for two perspectives. The first is, if we reduce the margin for distributors a lot then there are actually very few people who want to sell this product. We need to keep in mind is that most of the distributors in an economy, which is really growing today and the jobs are rapidly growing, it is very difficult to find people who are ready to work for an agency as a career because it is not very lucrative from a perspective of the margins which you are getting today and secondly there is no fixed salary. That is one area where I would say the industry is really suffering and something needs to be done. The second is the commissions for non-ULIP business continue to be where it is. So the arbitrage, from a distributor�s perspective has actually become quite a lot. My personal opinion on this issue is that going forward we need to really increase the commissions in ULIP if we want to see the benefits from a customer�s perspective, When you see ULIPs there are three-four advantages. The first is you could actually select a sum insured, which is more or less in the same premium. You don�t have that flexibility, typically, in case of traditional products. The second thing is you could do a dynamic asset allocation either yourself or through funds like balance fund or funds where debt equity portion keeps changing every year. All this is tax free in the hands of the customer. When the product becomes much better, it offers huge benefits, especially, from a post tax return perspective; as compared to other financial instruments we are actually seeing a huge dip in ULIPs. My request to the regulator would be to please look at increasing the amount of commission in case of ULIPs so that the distributors find it lucrative enough to push this product. I would also request everyone who participates in debates about higher distributors margins that when you don�t really have people who will go out and sell a product is that better for a customer or is it better that you actually pay a reasonable commission to the distributor. Q: Would you recommend an investment in ULIP schemes as a tax saving plan and how much of a percentage of ones portfolio should it be? Do you have any recommendations on schemes as well? Vaid: For us, the core starting point is the financial plan which is what we insist to all our client families whenever we start a relationship. In a financial plan, we help articulate their dreams and prioritize them into goals. Each goal then has a risk profile attached to that and along with that asset allocation. In asset allocations, your goals can be something as long-term as retirement. Any goal which is 10 year plus, whether it is retirement or children�s education, we try and bundle ULIP into it because our thumb rule for advising a ULIP is that it is a long-term instrument. We need to look at a 10 year plus kind of horizon because that is where the difference between net yield and gross yield really reduces, expenses get spread out over a period of time and you are able to get an inherent benefit which is there in this instrument of being able to progressively asset allocate as you get nearer to your goal term. From an asset allocation and long-term strategy point of view, 10 year plus ULIP fits in and that is where we try and articulate ULIPs into our strategy. Our view is very clear, less than 10 years, look at mutual funds, ten year plus ULIPs look much better. The two recommendations which we keep actively suggesting to our clients as part of financial planning, is ICICI Prudential Lifestyle Fund where there is an auto allocation which is linked to a targeted date and as you near that date the allocation changes. The other one is HDFC Young Start which is linked to a childhood goal. The benefit of these two plans is they are long-term in nature where the underlying portfolio both in equity and debt are being managed from a long-term perspective. Their performance vis-�-vis benchmark has been very decent. It really adds up if you are able to manage your asset allocation strategy linked to a goal. That is the primary strategy which we are using for ULIPs. Q: How much debt is attracting attention amongst retail investors as an instrument? We saw the kind of response there was to the SBI bond issue, is it Fixed Deposits (FDs) and debt instruments where there is a greater draw too this year? Goyal: Absolutely. People are looking at more from returns from a guarantee perspective. If you look at the life insurance industry in the last four-five months, the single premium sales have been very strong. Most of the single premiums which have been sold have some minimum guarantee. Typically what we are seeing from insurance perspective is that people prefer to move towards single premium with some sort of a guarantee. The fixed deposit rates have been very strong in the last two-three months especially by a few banks. There is in my view a competing option for customers between Life Single Premium policies and Fixed Deposits. The only thing I would request customers, investors and policy holders to look for before they decide whether they should go for Fixed Deposit or a single premium plan from the life insurance industry is, please see returns from a post tax perspective because that could make a huge difference to the customer when he receives the money. China can outperform in next 6 months, India needs some time: Credit Suisse