Shrinking Cover

The life insurance market grew at 25% in the past year, but the sum assured per policy is shrinking, thanks to the proliferation of ULIPs

The latest IRDA (Insurance Regulatory and Development Authority) data shows that life insurers grew their business by a whopping 25% in the past financial year. The 23 life insurers mopped up first-year premiums of Rs1.09 lakh crore in FY09-10, up from Rs87,108 crore in FY08-09 when new premium income had declined by 6% due to the financial crisis.

Interestingly, State-owned Life Insurance Corporation (LIC) has outpaced its private-sector competitors with a 34% growth and has also managed to increase its market share to 65% from 61% in FY08-09. While LIC’s new premium collection rose 34%, to Rs70,891 crore, the 22 private insurers collectively mopped up Rs38,399 crore, recording a modest growth of 12% over the previous year. A large part of LIC’s exceptional growth has come from sales of single-premium policies which amounted to Rs26,000 crore.

The robust growth in premiums may suggest that people are waking up to the necessity of insuring their families from economic hardship, but the fact is that the sum assured (life cover) per policy has been steadily declining. ULIP sales are growing at a much faster rate than sales of traditional insurance policies, thereby aggravating the problem of under-insurance. As of June 2009, the total amount of sum assured by about seven lakh ULIPs was about Rs1,067 crore, implying an average sum assured per policy of just Rs15,000. In December 2009, about 41 lakh outstanding ULIPs accounted for a total sum assured of Rs3,199 crore, reducing the sum assured per policy to a mere Rs7,800!

Highest NAV & Fine Print

In our cover story of 22nd April, we have described how ‘Highest NAV Assured’ ULIPs (unit-linked insurance plans) is the latest con game being played by life insurance companies to garner more business from risk-averse investors who are too bored to read the fine print. Under Life Insurance Corporation’s LIC Wealth Plus scheme launched in February, you have to pay a minimum single premium of Rs40,000 or Rs20,000 a year for three years. The minimum sum assured (if the policyholder dies during the policy term) is 1.25 times the single premium or five times the annual premium. The maximum sum assured is five times, 2.5 times and 1.25 times the single premium for policyholders who are below the age of 40 years, 41-50 years and above 50 years, respectively.

We had pointed out how ‘highest NAV’ schemes will fetch poor returns because the only way you can get guaranteed NAV is by having your money locked up in debt. This, of course, would mean that your ‘guaranteed’ returns would be pathetic. Neither the insurance company nor its agents tell you this. But what really adds insult to injury is the fact that insurance companies will charge you money for the grand privilege of the guaranteed maximum NAV or minimum returns. LIC will charge 0.35% (of the fund value). The other charges under LIC Wealth Plus are as follows:

• Allocation charge for single- premium policy: 5% up to Rs4 lakh; 4.5% above Rs4 lakh.

• Allocation charge for regular-    premium policy: 12% for premium up to Rs2 lakh in the first year and 2.5% for the remaining years of the policy term; 11.75% for Rs2 lakh-Rs4 lakh, 11.5% for Rs4 lakh-Rs7 lakh; 11.25% for premium above Rs7 lakh.

• Fund management charge: 1%.

• Policy administration charge: Rs60 per month for the first year, Rs25 for the second year and a 3% increase for each successive year.

If your earnings are primarily from debt instruments and these are the kind of charges you are paying insurance companies, do you still think ‘highest NAV’ plans are a good bet?

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