Unit-linked insurance policies (Ulips) that used to account for about 85-90 per cent of overall sales till one-and-half years ago, have lost sheen due to volatile equity markets and changed regulations.Life insurance companies say that share of traditional insurance plans is going up; but are traditional insurance products, which offer annual returns of around 6 per cent, best suited for a customer?

Fall in Ulip sales: In September 2010, the Insurance Regulatory and Development Authority (Irda) brought out new regulations to overhaul Ulips. One major change was drastic cut in agent’s commission. This led agents to stay away from Ulips and, instead, focus more on ‘rewarding’ traditional plans.“Three factors that impacted Ulip policy were change in agent commissions, rising interest rates and volatility in the equity market for past few months. Premium of traditional policies are generally high due to which the commissions are also higher. This play an important role for agents,” said Gorakh Nath Agarwal, chief actuary at Future Generali India Life Insurance.

Although the norms made Ulips more investor-friendly, their sales dropped significantly. Adding to the woes of the insurance industry, the equity market started performing badly and making many investors to shun Ulips. How good are traditional plans? Traditional insurance plans are generally guaranteed insurance plans, where the policyholders are informed about the maturity benefits in advance. Downside of this guarantee is that the insurance companies do not have the flexibility to invest in the equity market. In traditional plans, risk of the investment lies with the insurance company and insurers pay customers in the form of bonus, out of the profits earned by the company. On an average, bonus declared by life insurance companies ranges around 6 per cent annually.

“Traditional policies are long term in nature, and the returns more or less match bank’s savings account returns. Investing in traditional plan is for those who are risk averse and have definite goals to be achieved in the long term. The element of certainty are the main factors for traditional policy sales,” said MN Rao, MD, SBI Life Insurance. In traditional policies, the policyholder does have the option of checking the policy fund value, although the maturity value is fixed. Under Ulips, the policyholder can monitor the net asset value (NAV) of his investment on a regular basis.

Contrary to the popular perception that commission paid to the life insurance agents for Ulips, average commission paid under traditional plans is much higher. Commission paid by life insurers, including Life Insurance Corporation of India (LIC) and 22 private insurers under traditional plans was 12.54 per cent of the premium, while for Ulips it was only 4.19 per cent of the premium in 2010-11.

Alternatives available: According to financial planner Anil Rego, due to high interest rates, most of the investors have moved towards bank deposits and company deposits for short duration of three to five years.

At present, a five-year tax deposit with a large bank can get you return up to 9.75 per cent. Public provident fund (PPF) has revised its interest to 8.6 per cent for this financial year. Some investors are also investing in gold and silver due to the upward movement seen on these metals. But is it a good alternative?

In the pre-Ulip era, traditional life insurance plans were introduced by insurers to encourage savings habits among individuals. Since, pure life insurance products like term insurance plans were not very popular, these traditional insurance policies were considered as a financial instrument with twin benefits of insurance and investment. As traditional policies provide fixed returns in case of death or maturity of the term, they are still considered risk free.

“It is advisable not to mix insurance with investment. However, insurance is an important need and all individuals who have a financial obligation must buy insurance to cover risks against unforeseen circumstances in the future. If you do not wish to invest in risky Ulips, you can buy a term plans to get life cover and invest in other financial instruments like bank deposits and PPF which give attractive post-tax returns,” Rego said.

However, experts say that Ulips have been in the industry only for the past seven to eight years, and due to rampant misselling, it was sold as three- to five-year products. When the equity market was witnessing a bull run, investors got high returns. Commission to the distributors — particularly high first year commission and decent renewal commission — are also some of the main factors. People have thought that Ulips are for short term, and the volatile markets gave negative returns. But, for a long term with proper knowledge on switching funds, the customer can make the Ulips more useful to him.

Ulips are transparent with all details clearly spelt out in the policy document. They also provide the option of switching funds of the customer depending upon his risk appetite from debt funds to equity-related funds in Ulips. Policyholders can avail this benefit for a certain number of times in a year free of cost, after which the insurers charge certain fees for the switching. These switching are useful in volatile markets and interest rate movements.