Published in mint on 29th May, 2017.
Insurance Regulatory and Development Authority of India (Irdai) has taken many steps to increase the distribution footprint of insurance products in India. And in order to get more feet on the street, the regulator has allowed the industry to make use of point of sales persons (PoSPs).
PoSPs are at the bottom of the pecking order of insurance distributors. Their qualification criteria are low, which makes it easy to hire them. In the life insurance space, Irdai has allowed PoSPs to sell simple products such as: term policies, guaranteed endowment and money back plans and annuities.
But simple and easy to understand plans should not be limited to PoSPs alone. With the industry going for open architecture, where distributors can sell products of more than one insurer, it is important to have basic products. This makes the job of understanding, explaining and comparing much easier. So, what makes for a simple, easy to understand life insurance policy? We asked a few experts from the industry and financial planners for their views.
Easy to understand
It wouldn’t be simple if it’s not easy to understand. According to experts, a simple product is one where it is easy to know how much do you invest and what returns you get on it. “To say that you pay X amount and get Y amount is not enough…unless you mention the return on investment, a simple savings or investment product is not complete. A fixed deposit, that way, is a simple over the counter savings product,” said P. Nandagopal, founder and chief executive officer, OpenWorld Insurance Broking Ltd. There are primarily three kinds of bundled insurance products. First, guaranteed insurance plans, which guarantee the benefits upfront. Think of them like recurring deposits with a crust of life insurance. Second, participating products where a minimum amount—the sum assured—is guaranteed but the actual return from the plan is pegged to the performance of the participating fund. The third are unit-linked insurance plans (Ulips), which are a market-linked product: think of them like a mutual fund with an insurance cover wrapped around it.
Among these investment products, Irdai has allowed PoSPs to sell guaranteed products, as the benefits are mentioned upfront. But according to Priya Sunder, director, PeakAlpha Investment Services Pvt. Ltd, that doesn’t make the cut. “An easy to understand product should offer comparison, at the very least, just like the fixed deposits. But guaranteed insurance plans don’t lend themselves to comparison because they don’t have a uniform structure,” she said.
And this brings us to the next important feature of an easy to understand life insurance plan: its design. For example, what do you make of a policy that guarantees 396% of the sum assured (and not of the premiums paid) on maturity? The figure of 396% certainly looks good. But what if we tell you the net return on this product (return on premiums paid) would be only 4%?
For a policy to be understood, the design needs to be simple. “When guaranteed returns are defined as a percentage of the sum assured, it confuses the customer because it complicates the give and get. This should be expressed as an annualised return comparable with other investment options,” added Kapil Mehta, managing director, SecureNow Insurance Broker Pvt. Ltd.
But understanding shouldn’t be confined to benefits alone. You need to be able to understand easily the consequences of exiting a life insurance policy midway. “In traditional policies, the surrender costs are based on a formula or periodically announced scales. These are difficult for lay persons to understand,” said Mehta. “Surrender penalties need to be simple and reasonable. As in the case of Ulips, where the penalties are mentioned in rupee terms and caps are known,” he added.
What makes the cut?
As per Gajendra Kothari, managing director and chief executive officer, Etica Wealth Management Pvt. Ltd, term plans are simple to understand products: “All you need to understand is the amount you pay every year for the sum assured you choose. If policyholder dies during the policy term, the beneficiary gets the sum assured, and if he survives, he gets nothing. A term policy is also the cheapest form of life insurance, limiting the scope of a missell. As you only pay for the cost of insurance, you can also move from one insurer to another.”
The same, however, can’t be said for bundled plans, which are way more expensive as they also carry the investment component. “In the case of bundled plans, premiums are much higher. So, if you are mis-sold a product and you want to exit, the surrender costs can seriously destroy value for you,” added Kothari.
The industry is increasing its distribution footprint to get more insurance sold to the customers. An equal emphasis therefore should be given to simplifying insurance policies. For now, other than term plans that have all the attributes of an easy to understand plan, other policies don’t make the cut.