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Published in Mint on 5th February, 2018.
While most insurers favour status quo, will the lowering of surrender charges in traditional insurance cum investment plans benefit the policyholders? We ask the experts.
R.M. Vishakha, MD and CEO, IndiaFirst Life Insurance Co. Ltd
Unit linked insurance plans (Ulips) are market-linked, and investor bear the risk of capital and returns. A traditional product guarantees capital and returns, with the risk borne by insurance company. Comparing these only at surrender value is unviable, as the structure of the two is different and they are managed differently. Broadly speaking, traditional products are managed by the ALM (asset liability management) principle and are monitored regularly to balance returns and safety. The onus of absorbing long term interest rate risks and managing assets to meet the commitments lies with the insurer. About lowering surrender charges, I believe we are trying to solve the issue of customers losing the premiums paid in case of policy discontinuance. While the issue is genuine, the solution is impractical (as proposed by Irdai’s Product Committee Report), given the structural needs of the product. Also, it does not address the inherent objective of creating long-term financial security by passing on market volatility risks to the insurance company. We need to ensure that the customer does not lose money in case of discontinuance. The straightforward solution is: empower customers to fulfil their original intent through premium holidays, deferred premiums, reduced premiums, recasting the plan and other means; rather than encourage higher surrender values that penalise those who stay invested.
Tarun Chugh, MD and CEO, Bajaj Allianz Life Insurance Co. Ltd
The surrender values payable to policyholders can be higher. This will help increase the returns to policyholders, even on early exit. However, the industry needs to discuss and decide what level of surrender values are feasible. One of the major industry concerns is low level of persistency in insurance policies. For this, one must understand why policyholders discontinue policies. This could be due to reasons such as change in affordability to pay the premiums or immediate need for finances. This can be addressed in other ways, while at the same time encouraging the policyholder to continue her insurance cover and avail its long-term benefits. Some of the options can be: availing loans from her policy at affordable rates (this is already available; maybe it needs to be customized to policyholders’ needs), reductions in premium levels, reductions in premium payment periods, discontinuance of premium for a short period. The traditional policyholder would have purchased a policy with some fixed life goal in mind, like child’s education or marriage (while Ulips can be taken for their investment growth). I believe the life goal for which the traditional policyholder bought the plan should continue to be achieved. Surrender values payable to policyholders could be higher as this will not encourage additional surrenders, keeping intact the purpose of buying the policy in the first place.
Kapil Mehta, co-founder,
A principle in designing financial products is that exit should be easier if the product is complex, sales practices poor or product performance possibly low. In traditional life insurance, quite often all three conditions are true; which is why exit loads need to be significantly reduced. Currently, product illustrations carry significant information but are difficult for laypersons to interpret. The expected rate of return is often not disclosed, it has to be calculated. Policyholders do not understand the time-value implication of bonuses paid on maturity. They also have little understanding of the high surrender charges when they buy insurance. The fact that sales practices are poor is an open secret. Some insurers are addressing this but the industry as a whole has a long way to go. The issues range from customers not realising that they are buying insurance to wrongful promises on benefits.
Most buyers of traditional insurance are taken aback when they realise that they may earn less than 5% annualised return. Even after this realisation, they often have no option but to continue paying premiums because exit costs are so high. The product committee report on life insurance addresses low returns by asking for flexibility in investment avenues. While it attempts to shift responsibility for misselling to distributors, it does not simplify product communication enough and does not clearly recommend an increase in surrender values, which it should.
Shweta Jain, founder, Investography
Traditional plans in insurance are the first investments most youngsters make, as they are ‘advised’ by their parents or other elders that this is the best way to start saving taxes and also to start saving for their future. However, this is an expensive way to start inculcating the habit of saving, as there is no exit; at least not one that is cheap.
Once committed to it, you are stuck with it for the rest of the policy’s life unless you are ready to pay huge charges, which none of us would like to—because then we feel like we’re paying very heavily for a mistake that we committed and we don’t like to accept these decisions as mistakes. As a result, we just continue to pay premiums for the rest of the policy’s term.
There should be lower surrender charges, especially because these are not decisions we have taken while fully knowing what we are getting into—especially when we were young—that there are other options available which were cheaper, better and more suited to our needs. Even if we did not take these policies when we are younger, our life and goals change over time and we should have the flexibility to change the way we invest, according to our new realities and situation in life.
We are living in a world where costs are constantly coming down, in a world where we have the option to change the decisions we once made and I think it’s about time insurance falls in line too.