Less popular, low-cost insurance products are compensating the distributors’ fall in income from selling equity funds
Low-cost life insurance products are making a comeback, occupying the space once reserved for equity mutual funds. With the sales of equity mutual funds almost grinding to a halt thanks to abolition of entry load from August 2009, low-cost life insurance products that look like equity mutual funds have got a new lease of life.
“Life insurance companies always had products that were of lower cost. But distributors were not keen to sell them because they made much more money selling other insurance products. But with distributors now unwilling to sell equity mutual funds, insurance companies have sensed an opportunity to sell low-cost insurance products too,” says a chief executive officer (CEO) of an insurance company.
Accordingly, these products are being dusted down and pushed into the market. Plans like HDFC’s pension plan which is a single premium plan, are making a comeback. Other products in this category are LIC’s Market Plus unit-linked single premium policy and ICICI Prudential’s Life Time Super Policy. For instance, LIC’s pension plan deducts 3% (Rs990) as allocation charges for a premium of Rs30,000 which comes with options of life cover, accident benefit and critical illness benefit.
In fact, one of the largest and high-profile insurance companies is set to launch a product soon that will mean a commission of just 2% for its distributors.
The mutual fund distributors are also put off by the cumbersome and frequent changes in regulations. They want to ditch mutual funds completely. Many of them wanted insurance companies to protect their revenues they used to derive from selling mutual funds. To fill this gap in income, insurance companies have decided to highlight the low-cost funds in their portfolio.
Earlier, distributors were reluctant to sell these because they used to make much more money on selling regular insurance products. “If I have to sell an insurance product, I might as well sell one with the highest premium,” said a distributor.
“Why would I sell a product that yielded such low commission?” he asked.
Meanwhile, in the correction of the last two weeks, some money has come back into equity funds. “But this is not retail investors’ money. It is smart money that usually comes in when the market is down sharply. It also goes out quickly, once there is a rebound,” says a CEO of an asset management company.