Unit-linked Policy Struggling Under Covid-19

Unit-linked insurance plan (ULIP) is a product by life insurance companies that offers a combination of insurance and investment. This makes ULIP a goal protection product as it helps you invest for a life goal and at the same time makes sure that the goal is achieved in both cases - when you survive the policy period or when you are no longer around.

ULIPs in past had earned bad reputation owing to heavy charges. However, relentless push by the regulator IRDA has helped reduce charges significantly. In order to make the product competitive, especially with regards to Equity Linked Saving Scheme (ELSS), a good number of Insurance companies have launched fourth-generation ULIP that has no policy allocation or policy administration charges. Fund management charge is comparable with that of the ELSS.

Since a ULIP plan has an investment component along with the insurance coverage, part of the premium is used for life cover and expenses such as fund management charges, while the remainder is invested in equity, debt or hybrid (mix of both debt and equity) funds depending on the type of the ULIP you opt for. You may switch among the funds if you think your fund has not been doing well, but if you surrender the policy before five years, you'll be charged Rs 6000 because ULIPs come with a lock-in period of five years. After five years, you can either withdraw funds partially or completely to foreclose your policy. However, experts advise to stay invested for at least 10-15 years to earn attractive yields on your investments. So, only those with a long-term horizon and confident of paying premiums for the entire policy tenure should go for it.

Let's understand the maturity and death benefits offered on ULIP plans:

A: Maturity benefit - At the end of the policy term, the life cover, that is, the sum assured, ceases to exist and you will only receive the fund value as maturity benefit. Upon maturity of the policy, besides the lump sum payout you also have to option to choose regular payout such as monthly, quarterly, half-yearly or annually.

Some insurers offer loyalty additions to the investor if they are in the fund for a longer period of time - usually 10 years and more. Such additions can be paid either as a percentage of the sum insured or a percentage of the fund value. 

B: Death benefit - The sum assured in the ULIP is the minimum guaranteed death benefit. The insurer will give the fund value if it grows bigger than the sum assured. Some policies offer the fund value along with the sum insured. However, such policies charge a higher premium.

C: Cost is key - Going by the product structure and charges, ULIPs appear to be expensive. However, most 4G ULIPs have done away with most of the charges. The cost structure varies depending on the insurer and the type of the ULIP. The common fees and charges are as follows:

1: Premium Allocation Charge: A good chunk of premiums paid in initial years goes into initial and renewal charges along with the agent's commission. However, many 4G ULIPs have done away with it. You should make sure to check this before you buy a ULIP.

2: Mortality charges: It covers the cost of life insurance. It depends on age and sum assured and are deducted on a monthly basis. As your investment grows, the value at risk comes down for the insurer and hence the mortality charge gradually comes down.

3: Fund management charges (FMC): The insurer charges it for managing funds in the ULIP. It is deducted before arriving at the Net Asset Value and is adjusted from NAV on a daily basis. The maximum FMC allowed is 1.35 per cent of the fund value each year and is charged daily. 

4: Policy administration charges: This is levied for the administration of the policy and charged on a monthly basis. Most new-age ULIPs have not been levying this charge, so check it once with the insurer before buying the policy.

5: Fund switching charges: A limited number of free fund switches are available, but Rs 100-200 may be charged on subsequent switches.

6: Partial withdrawal charges: Some plans offer unlimited partial withdrawals, while others have a limit of two-four times.

D: Key riders that you must know

1: Waiver of premium upon death: With this rider on a ULIP plan, the policyholder can ensure that the insurance amount is used only for the long-term purpose that it was initially bought for. The future premiums are waived off and are paid by the insurer itself along with a lump sum payment at the time of death. Also, the entire corpus built over the years is paid to the nominee at the completion of the policy term. This feature can be beneficial for people wanting to leave safety net corpus for their children. Waiver of premium rider is also applicable in case of permanent disability, an accident or inability to work due to a critical illness. It ensures that all future premiums towards your ULIP get waived, and your investment and life cover continue unhindered.

E: Is ULIP better than term and endowment? - The three plans are not comparable as all have different features and objectives. The decision as to which one to buy should be taken on the basis of an individual's portfolio and her needs and income level. The crux is to get enough life cover. Typically, a ULIP provides a max cover of 20 times of the annual premium paid. So, a person looking to have a cover of Rs 1 crore, will have to pay Rs 5 lakh as annual premium under ULIPs, whereas a term plan may be 1/10th of this amount, says Arvind Rao, founder of Arvind Rao & Associates and a Sebi-registered investment adviser. Endowment plans also have an investment component to it, but the investment is non-equity linked.

ULIP is exposed to the market, and since premiums paid are divided into various charges, it makes ULIP costlier than term and endowment plans. However, each plan is meant to fulfil different financial goals of an investor. It is advisable to understand the investor's goal and current portfolio instead of deciding only on the basis of premiums.

F: Is ULIP better than mutual funds and ELSS? - One advantage that ULIPs have over mutual funds and ELSS is tax exemption on the maturity amount of the fund value. In MFs and ELSS, if your profits cross Rs 1 lakh in aggregate terms in the long-term (after a year), you have to pay long-term capitals gains tax of 10 per cent. However, in ULIPs, the death benefit is tax-free and maturity payouts are tax exempted under section 10(10D) of the Income Tax Act. As for premiums paid in ULIPs and investments in ELSS are concerned, both are eligible for section 80-C tax deductions.

G: Who should go for ULIPs? - ULIPs were the most mis-sold insurance product before the reforms in September 2010 took place because insurance agents used to earn heavy front-load commission on selling these policies.  It was sold as an insurance-cum-investment product, but neither did it offer good returns as people were not aware of the long-term holding nature of the product nor the life cover was adequate. The industry average was 10 times the premium as the sum assured. Sadly, many ULIPs only gave up to five times the premium as the sum assured. In September 2010, the IRDA came out with a series of amendments, the most important being capping the annualised ULIP charges at 2.25 per cent for the first 10 years of holding.

In 2015, more changes took place. The fund management charges were capped at 1.35 per cent a year. Limits were also fixed on premium allocation charges, mortality charges and on the commission insurance agents earned on ULIPs.

In order to avoid mis-selling and give investors a conservative idea of the investment, charges and maturity value, IRDA also mandated that life insurers offer a benefit illustration on ULIPs. It gives an idea on how the premium is invested, charges deducted and how the fund value grows. Based on the benefit illustration the underlying assumption of the gross investment returns currently stand at 4 per cent to 8 per cent.

Investors can also use a combination of term plan and ELSS to get the combined benefit that ULIPs offer. However, ULIP as a single product saves much of operational efforts. The online or 4G ULIPs have very low or no charges at all. Premium allocation and policy administration charges are typically zero. The fund management charges are also capped at 1.35 per cent and range between 1-1.35 per cent. Many companies now offer ROMC (return of mortality charge) feature as well, which is charged for the life cover in the plans.

In fact, a few low-cost ULIP, which can be bought online these days, have less than 1 per cent charges. Besides, ULIP also lets you invest in an asset mix of debt and equity at one place and offers flexibility to make switches during different market movements. Therefore, it is difficult to make a passing judgement as to which category is better. Based on your need and convenience, you can take the final call.

Manipulation In Office

Manipulative, bad bosses use many different communication strategies, but the intent behind a lot of their tactics is the same: to get you to prioritize the company above your own best interest. You may be receiving these messages from your boss, who is trying to get you to keep your head down and work longer and harder than is healthy for you. Don’t be fooled.

Work is your family - Using the intimate language of family is one common message bad employers say to ensure commitment to their cause. If your boss is like your loving family, then you are less likely to speak up against any unethical business practices or bad decisions the company makes.
As one of his employees said during a company's meeting  - “We’re not a family. You won’t even tell me anything! You’ve completely violated all the trust that we had in the product, in the company, in the brand and in you.”

In a good family, your membership and rights are not conditional, but in a business, they can be.

I need you to be available at any time - Advances in technology mean that we can work from anywhere, but the downside of this is that some bosses think you can always be working. The Academy of Management found that workers spent on average eight extra hours a week handling work emails after hours.

You have the right to spend free time away from the reach of your employer. France has formalized this belief into legislation. Under their “right to disconnect” law, companies with more than 50 employees have to ensure hours when staff can ignore business emails.

Being on call 24/7 is not good for your health. One study on 315 employees found that those who had to use technology to work at home around nighttime had worse sleep quantity, quality and consistency.

And working longer does not even produce better work for companies. If you find yourself working longer than 50 hours a week to meet the demands of your boss, this overtime is probably not going to produce better work. Performance starts to plateau at 50 hours and sharply falls after 65 hours a week.

Everything is fine - One of the worst bosses is the boss who is not there. They may be physically present, but they are psychologically absent from their duties as a leader. They offer vague praise, but no tangible feedback for you to learn from. They say the company is doing fine, even when layoffs, “pivots” and budgets in the red say the opposite.

A laissez-faire leader “may avoid decision making, show little concern for goal attainment and seldom involve themselves with their subordinates, even when this is necessary.” In their analysis, it was the most common type of incompetent leadership employees experience.

This hands-off leadership becomes manipulative when you need feedback and guidance about your future at the company. Instead, you’re given the unsatisfying answer of “everything is fine” to keep you working even though you have questions that need to be addressed.

That’s not my problem - is a demoralizing phrase to hear because it tells you that your boss does not care about helping you. This behavior silences the employee and discourages them from bringing further problems or issues to the boss’ attention, which results in a drag in performance and efficiency because problems chronically remain unsolved. It also discourages employees from engaging in whistleblower behavior, which opens the door to unethical and illegal behavior in the organization.

This is how we’ve always done it - This language comes from a boss who only enforces the rules, and does not have the power or desire to shape them. When your boss says this, they are signaling they are going to mindlessly follow the status quo.

Thinking that the old way of doing things is the right way to keep doing things is a trap that even well-intentioned leaders make when assuming new roles. Leaders fail to see that success in the new role requires you to stop doing some things and to embrace new competencies.

When your boss tells you that this is how things usually go, they are signaling that they are not open to new ideas and that they do not want you to offer a challenging response. Conley said that leaders “often resort to this response as a way to subtly manipulate employees to go with the flow and not make waves.”

Don’t you agree? - is a phrase that leaders can tack on to the end of a remark to seemingly invite discussion, while actually ensuring discussion does not happen.

By virtue of their position and title, leaders have more power in the boss/employee relationship. Saying ‘Don’t you agree?’ automatically puts the employee in an uncomfortable position of either choosing to agree with the boss even if they don’t, or confronting the boss in disagreement.

Indonesia Insurance Assets - Sluggish Sales

Sluggish sales of investment linked insurance products are considered to have caused a decrease in the total assets of the non-bank financial industry (NBFI) in the first quarter of 2020.

Total NBFI Assets - Total NBFI assets at the end of March 2020 reached IDR2,490.09tn ($178bn), representing an increase of 2.93% compared to a year ago, but a decrease of 2.64% compared to end-December 2019 (OJK).

Throughout 2019, total NBFI assets grew monthly. However, entering January 2020, the total assets declined until the end of the first quarter of this year.

OJK noted that of the seven NBFI sectors, four recorded a decline in total assets at end-March 2020. The four sectors were insurance, pension funds, special financial institutions, and supporting services. In percentage terms, the biggest decrease occurred in the supporting services sector which included insurance and reinsurance brokerage businesses.

Insurance sector - When viewed in nominal terms, the largest decline occurred in the insurance sector with assets reduced to IDR82.03tn. The total assets of the insurance sector are in five categories, namely life insurance, general insurance, reinsurance, compulsory insurance which includes Taspen and Asabri, as well as social insurance which includes BPJS Health and BPJS Employment.

Of the five categories, based on OJK data, general insurance and reinsurance recorded asset growth and three others recorded a decline in assets. The biggest decrease occurred in the life insurance business with a reduction in asset value of up to IDR61.5tn. The life insurance industry recorded total assets of IDR529.2tn at end-March 2020, a decrease of 10.4% compared to the end of December 2019 and a fall of 7.2% when compared to end-March 2019.

Poor Unit-linked Performance - The decline in the total assets of the insurance industry, particularly life insurance, was affected by slowing unit-linked performance which in turn had been hit by disruption in the capital market. The sluggish performance of the capital market caused a significant decline in the value of shares and mutual funds. 

Regarding life insurance assets, most of them were insurance product assets related to investments. The assets were invested in capital market and money market products.

Based on data from the Indonesian Life Insurance Association (AAJI), unit-linked products represented 63.1% of the total policies in 2019.

Change, Adapt Or Die - Life Insurer

An industry that’s changing particularly quickly is life insurance, where participants are seeing a major increase in demand from consumers. There are clear parallels with what happened just over a century ago when the Spanish Flu pandemic hit us.

There (was) a clear surge in life insurance sales in 1919 and 1920, particularly for ordinary insurance. Insurance executives… (reported that) 1919 was a banner year for selling life insurance and largely credit the epidemic for it… a survey of 32 life insurance companies operating in the state of Connecticut showed a 79% increase in life insurance written in the first six months of 1919, relative to the first six months of 1918.

As in 1919, the current pandemic has caused people to re-evaluate their lives. Confronted by an onslaught of graphic images of overcrowded ICU wards, they suddenly see death as something real and life cover for themselves and their families as necessary.

Demand for life insurance has surged as a result - this pandemic is going to trigger a life insurance disruption that will go far beyond just an increase in demand. The Covid-19 disruption will drive rapid, profound digital transformation of the industry, and fundamental changes in the way life insurers, brokers and customers engage through the value chain.

Up until February, insurtech was “selling policies online”, now it’s “using technology to make your business and your value proposition better, faster and more cost effective”.

It’s taken a massive global pandemic to force the life industry out of its comfort zone and into a new digital normal.

Lockdowns, social distancing regulations and the fear of contracting the virus have forced people to engage remotely. And not just in the sales process.

All functions have shifted online overnight. The transition hasn’t been perfect. There’s lots of sticky tape holding things together. And some businesses have been left behind. But, there’s no going back. Things will get more digital from here, not less.

So, traditional life players have a choice — adapt and thrive or don’t and become a Darwinian statistic. Demand is not gone.

If anything, it’s increased. But call centres can’t operate like they did — at least not for now. And customers don’t want to meet face to face, enter clinics or go for blood tests. They want reliable, no touch life cover, right now and at a reasonable cost.

We're not going to feel massive pain over the next 12 to 18 months as a result of Covid-19. We are. We’re also going to see some businesses — those that are well-suited to the new normal and others that can reinvent themselves — do better than they ever have.

This will likely be more true for life insurance than any other industry.

Indonesia - Approval For Unit-linked Online

The Financial Services Authority (OJK) has eased rules related to the marketing of investment related insurance products by allowing the online sales of such products.

Mr Riswinandi, the executive head of Non-Bank Financial Institutions Supervision (IKNB) of OJK, said that the regulator had issued a circular that said that in the marketing of PAYDI (investment related) and unit linked products, face to face interaction can be conducted through digital modes such as video conferencing, video calls or a combination of these media.

At the same time, the OJK says that the wet signature in the statement of the prospective policyholder can be replaced with an electronic signature.

The signature is to indicate that the policyholder has obtained an explanation and understands the benefits, costs and risks of insurance products offered by the company.

First Condition - OJK says that digital marketing must meet several requirements. First, insurance companies must have adequate information systems and infrastructure that meet the principles of confidentiality, integrity, availability, and authenticity, and data are reliable, secured, consistent and accurate. Insurers must also maintain audit trails.

Second Condition - insurers must obtain a statement from the information technology vendor used by the company and the director in charge of the risk management function that states that the information system and infrastructure used are adequate.

Third Condition - insurance companies must have operating standards and procedures that support the implementation of digital or electronic marketing. This is to accompanied by a statement of approval from prospective policyholders and documentation in the form of video and audio recordings.

Insurers also need to have an infrastructure that allows electronic signature authentication.

In April, the Indonesian Life Insurance Association (AAJI) requested the OJK to allow life insurers to market investment related products where face-to-face meetings between marketers and prospective customers can be replaced by the use of communication technology. The AAJI also requested that the OJK remove the requirement for a wet signature and replace it with a signature in digital or electronic form.

7-eleven Sells Insurance

Convenience store chain Seven-Eleven Japan is partnering with insurance company MS&AD Insurance Group Holdings to sell life insurance, allowing the insurance company to avoid face-to-face sales amid fear of coronavirus.

Customers will be able to register the necessary information through multi-function machines in Seven-Eleven's 20,000 stores. The application process is complete once they pay the insurance fee at the cashier. Customers will also be able to do part of the process through their smartphones or PCs. 

Life insurance is normally sold by MS&AD's staff face-to-face with customers, and Seven-Eleven will be the first convenience store chain in Japan to sell life insurance. The partnership comes as insurance companies search for new sales approaches since the COVID-19 pandemic broke out.

Seven-Eleven and MS&AD are planning to set up call centers where licensed insurance sales staff can talk to customers 24 hours a day, 365 days a year, to ensure the same quality of services offered by insurance shops.

As the first step of the partnership, Seven-Eleven and MS&AD's affiliate Mitsui Sumitomo Aioi Life Insurance will start selling cancer insurance starting June 16. The monthly insurance fee will be set at several thousand yen.

Mitsui Sumitomo Aioi Life Insurance signs about 300,000 new personal insurance contracts per year. With its tie-up with Seven-Eleven Japan, the company targets 60,000 contracts per year, mainly for elderly people.