Tag: ULIP

Resources for developing financial literacy at a young age to ensure entrepreneurship-led growth, BFSI News, ET BFSI

Personal Finance

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Financial literacy, like every other life skill, is crucial. The earlier you expose it to your children, the better their money management abilities will be later in life. This money management practice lays a solid foundation for concepts like saving, spending, and investing in children.

Learning how to invest and manage money wisely will eventually become an important life skill for teenagers to master to achieve their goals. This becomes all the more important as India’s growth and development is going to be entrepreneurship-led in the future and learning the ropes of money management skills is very crucial at a young age.

Unfortunately, financial literacy is often left out of the traditional educational system’s curriculum. Children and teens enter adulthood without knowing how to manage their resources properly. As a result, parents are the primary educators when it comes to teaching teenagers money management skills.

Following are some ways parents can teach their kids about financial literacy:

  • To start, parents can give kids money to buy food in the school canteen to be able to keep a check on their expenses.
  • You can also help them understand the cost of things so that they will understand the value of money.
  • Piggy banks can be a great start for kids to learn about savings. They will cut out on expenses to start saving a little every day, thus beginning their journey towards financial education.
  • If kids list a few things, try not to buy them everything. Let them instead choose a few things to buy from that list. This will help them to spend wisely.
  • Monopoly and other business games will also make them proactive about money matters.
  • Take your kids to the supermarket, let them know your budget, and sit with them while preparing a rough list of things you want to buy in the supermarket.
  • Let them know if you’re facing any financial crisis, they might cut down their expenses and learn to spend wisely on things that matter.
  • Gradually introduce them to the world of investments, starting with an FD; open a bank account for them as well.
  • Once they learn about the benefits of investing in FDs, they gradually introduce them to other investment instruments.
  • Technology has also made investing simple with just one click, allowing consumers to invest with simplicity. Introduce your child to the concept of digital finance and help them make informed financial decisions.

Several organizations have taken the following actions to ensure that the teens are financially literate as part of the government’s financial literacy strategy.
1. Project Financial Literacy
The Reserve Bank of India (RBI) has undertaken a project, “Project Financial Literacy.” The project’s objective is to impart information regarding the central bank and banking concepts to various target groups, including school- and college-going children, defence personnel, senior citizens, women, and the rural and urban poor.The project is implemented in two modules. One module lets users get acquainted with the role and functions of the Reserve Bank of India. In the other module, users are introduced to banking concepts.
2. NCERT – Personal Finance Supplementary Reading Material
There are a total of 9 modules covered in this sequentially: Financial Plan, Budgeting, Managing your Money, Financing Assets, Protecting your Assets, Investing Money, Retirement Planning, Taxes & you, and Career Planning.
3. Pocket Money – the student’s Guide to Money
It is a financial literacy initiative by the Securities and Exchange Board of India (SEBI) and the National Institute of Securities Markets (NISM). The objective of this is to help school-going children to understand the importance of financial management and the value of money.
4. Financial Education for School Children
This material was developed under the guidance of the Advisory Committee for the Investor Protection and Education Fund (IPEF) of the Securities Exchange Board of India (SEBI) and by the National Stock Exchange (NSE). It covers modules on the following: Money Matters, Planning, Budgeting, Investment, and Stock Market.
5. Introduction to Retirement Planning for School Students
This material is developed by the Pension Fund Regulatory & Development Authority. It aims to explain retirement and how to plan for retirement with various pension schemes effectively.
6. Commodity Futures Market for Students
This resource helps students understand the basics of commodity markets.
7. Material on Insurance for Children
The resource is available as comics and videos and is developed by the Insurance Regulatory and Development Authority (IRDA). It aims to explain the basics of insurance, several types of insurance, insurance ombudsman, ULIP (Unit Linked Insurance Plan), etc.

Allow your children to learn about money, regardless of their age. They can grow into financially responsible individuals and entrepreneurs who make sensible financial decisions with the proper guidance and healthy money management habits. Adults who are skilled at budgeting build family relationships while also contributing to economic progress.

(The writer is Co-founder & CEO, Pencilton)



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HDFC Life to cap policies, channels’ share in sales, BFSI News, ET BFSI

Banking & Finance

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MUMBAI: As part of its strategy to grow consistently, HDFC Life Insurance has decided to keep a cap on the share of products and distribution channels. According to the CEO of the country’s most valuable life insurer, Vibha Padalkar, the Exide Life acquisition is aimed at increasing the share of agents and reducing dependence on HDFC Bank’s distribution.

Speaking to TOI, Padalkar said that HDFC Life has managed to survive volatility in macro-economic conditions and regulatory changes better because of portfolio diversification. As a result, the company does not want to increase the share of unit-linked insurance plans (ULIPs) to beyond the present level of 25% despite surging markets. Even when it comes to the company’s best-selling investment product Sanchay Plus, it has decided to cap the extent of sales.

“Bancassurance used to be around 75% of our business at one time. It’s hovering around 50% of the business. I am not saying that it will not grow. I am saying that other channels should grow faster purely from a diversification point of view,” said Padalkar.

On Friday, HDFC Life had announced that it will buy Exide Life Insurance for Rs 6,687 crore.

According to Padalkar, it is product diversity that has helped HDFC Life survive the shift in the regulation of ULIPs in 2010 that resulted in several other insurers losing market share. She added that it was this strategy that helped the company increase sales of protection policies during the pandemic.

“Our share of agency business had shrunk because we had focused on persistency of agents and reducing complaints, which we have got right. The Exide Life acquisition helps us to expand our agency force by 40%,” said Padalkar. Pointing out that the trend was for insurance to be sold through company advisers, she said that HDFC Life had all the tools in place to improve the productivity of agents.“Exide agents would be excited to have the bouquet of products that we have to offer because we are seen as a product innovator or product factory. We have the technology for our agents to quickly onboard customers or allow them to offer a pre-approved sum assured to the client,” she said. The private insurer, which has made huge investments in digital technology and artificial intelligence, has the capability of profiling the customer and their needs once his basic information is updated.

“We have a digital agent platform where they can do business without ever attending office. We have a Google-like tech solution, using which agents can get any product-related questions. This question can be asked in regional languages and forms can be filled in regional languages,” she said.



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What is insurance bonus – The Hindu BusinessLine

Personal Finance

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Two neighbours’ daily routine of watering plants leads to an interesting conversation.

Sindu: This mint family plant took only about three weeks to grow and it smells good.

Bindu: That is a sage plant. Not only is it aromatic, but it has medicinal qualities too.

Sindu: Great. That’s a bonus! Just what we need during these tough times.

Bindu: Speaking of bonus, my life insurance policy matured and I got extra cash as bonus.

Sindu: That explains your extra plants on the walls. But what is a bonus in life insurance?

Bindu: Well, ‘bonus’ in insurance is a benefit given by the insurer to a policyholder over and above the maturity amount of the policy. So when a life insurer makes profit, it is distributed in the form of bonus.

Sindu: Does every life insurance product offer bonus?

Bindu: No. Bonuses are usually offered with traditional products, that is, ‘with profit’ policies.

Sindu: How many types of bonuses are there?

Bindu: There are broadly three types – terminal, interim and reversionary bonus. Terminal bonus is a one-time benefit offered by an insurer when the policy matures, though it is left to the discretion of the insurer to pay this. Interim bonus is declared in cases where an insurance policy matures before the end of the financial year or in case of the insured person’s demise during the term of the policy. In case of reversionary bonus, a certain bonus value is added regularly to the policy. These bonus amounts continue to accrue until the policy term and are paid out at maturity. After declaring reversionary bonuses, if there are still residual profits available with the insurer, they normally are declared as terminal bonus.

Sindu: Do we know how much will be the bonus at the time of taking the policy?

Bindu: Not always, though there are products that do mention the bonus at the inception itself. Bonus is declared either as a certain amount (say ₹20 or ₹50) per ₹1,000 sum assured or as a percentage of the sum assured. As bonus is declared only when an insurer make a profit, it may not be known at the inception of the policy.

Sindu: Can I purchase a policy based on the bonus payment?

Bindu: You can. While you can check the historical bonus paid by an insurer on their websites, that shouldn’t be the only criteria for selection.

Sindu: Bonuses are a reward for staying invested for long-term.

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Budget proposal has not affected ULIP segment of ICICI Pru Life: MD and CEO

Banking & Finance

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Optimistic about the outlook for the life insurance industry, NS Kannan, Managing Director and CEO, ICICI Prudential Life Insurance, said as of now Covid-related claims for the sector are under control. In an interview with BusinessLine, he said while there continues to be demand for protection and health products, underwriting norms have become stricter for retail protection. Excerpts:

What is your outlook for the life insurance sector?

Amidst the pandemic, life insurance sector ended in the growth path. I expect the industry will see double-digit growth. We will have to watch how the pandemic develops but we will get back in line with nominal GDP growth of about 15 per cent.

Is the surge in Covid 19 infections a cause for concern for the sector?

Our industry’s claims will be linked to overall mortality of the insured population, which is very much under check. I don’t think it will be a big concern for the industry. We have increased the provision by another ₹33 crore in case some deaths have not been reported to us. Also, given the emergence of the second wave, we decided to be prudent and create a provision of another ₹299 crore. So, as of today, we are carrying a provision of ₹332 crore.

Number of life insurance policies dips in FY21; group covers lead the fall

How many Covid-related claims has the company paid?

We have reported 2,500 lives we had claims on in terms of number of deaths in our portfolio. Net of reinsurance, we had to pay out about ₹264 crore as claims.

ELSS vs ULIP: Which suits you best

What kind of products do you think there will be more demand for?

There has been a lot of demand for protection products and also health insurance products we are allowed to do. There is also momentum in group term insurance. The only caveat is that we are not able to entirely fulfil the entire demand. Given the pandemic one has to be careful about underwriting. Also, for large insurance, we need the support of reinsurers and they are also focussed on proper underwriting. Underwriting standards have become tougher. There is also still a bit of friction in terms of medical examination, which is needed for higher value insurance. This has slowed down the process of issuance. Demand is up but in retail protection there are some supply-side constraints.

ICICI Pru MF launches new fund of funds

Credit life, which is the second segment of protection, had got impacted in the first half but has come back in the second half because banks and NBFCs have started disbursements for retail home loans and other loans. Group term has been a huge opportunity and we had about 100 per cent growth in the segment.

Has there been an impact of the Budget proposal on ULIPs?

As an industry, we have moved away from tax-based selling to goal-based selling. Second, ULIP is a powerful product, allowing customers to take advantage of market movements in a transparent and tax-effective manner. Even in the new regime, customers can invest up to ₹2.5 lakh without tax implications. The new regime was in place from February 1 and there were two full months of this impact. But in our case, ULIP segment has grown 11 per cent year-on-year in the fourth quarter. Empirical evidence of the two months indicates there is no impact at all. As long as long-term investments are on the same platform across mutual funds and insurance, there is nothing to worry.

What is your strategy, going ahead?

Despite the pandemic, we are not changing our strategy to double our value of new business to about ₹2,650 crore by 2023. We will continue to pursue it through the 4Ps of premium growth, protection business growth, persistency improvement and productivity enhancement. Our focus will be on top-line growth. In the fourth quarter, we are firmly back on the growth back and that gives us confidence. We have about 600 new partners and we added seven significant banks last year. On the product side, we have a much diversified product mix. So all this gives us a lot of confidence that we can pursue top-line growth and expand the VNB.

Term insurance rates have been increased by some insurers. Will there be more repricing with the second wave?

The increase in term insurance rates was driven largely by reinsurers increasing the pricing. To the extent of reinsurance pricing, we passed it on in the month of July (last year). We don’t have any proposal to further increase pricing.

We don’t know how the second wave will emerge. We have to wait and see. World over, I don’t think the conclusion has emerged so strongly regarding the lingering or long-term mortality impact of the pandemic.

How do you view the increased FDI limit for the sector?

We wholeheartedly welcome the move as a company and industry. Recently, the draft rules were gazetted, which are reasonable and easy conditions to comply with. Insurance penetration is very low and it being a regulated business there will always be strict capital requirements for the industry and so foreign capital is always welcome. For us, it is a shareholder issue and not a company issue. As an insurance company, we don’t require any capital. We are quite well-capitalised with 217 per cent solvency ratio. We have also increased about ₹1,200 crore of Tier 2 capital.

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‘Current financial year turning out to be much better in terms of overall investment returns’

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The current fiscal is turning out to be much better than what was expected at the beginning of the year in terms of overall investment returns, believes Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance, adding that bond yields seem to have bottomed out and equity markets have recovered. In an interview with BusinessLine, he said it seems that bond yields have bottomed out. Excerpts:

How is the company doing in terms of investments?

The current financial year is turning out to be much better than what we had expected at the beginning of the year in terms of overall investment returns. The equity markets have recovered very well on the back of strong global liquidity and fiscal stimulus. Most of the economic indicators have started recovering and have come back to almost pre-Covid levels. Corporate earnings growth has also been better than expected. Even the fears of the second wave of Covid are addressed with the launch of vaccination drive globally, which has helped boost market sentiment and risk appetite. So, equity ULIP funds have also registered robust performance over the past year.

Are their concerns over returns, given the volatility in bond yields?

Bond yields have been on a declining trend over the past few years, giving scope for healthy capital gains in debt funds. The fall in yields has been sharp amid the Covid-19 pandemic, helping to boost returns for debt funds. However, this year, we have seen a significant rise in global and domestic bond yields due to rise in prices of commodities and stronger-than-expected revival in economic growth. We feel that rise in bond yields can lead to some volatility in equity markets.

Domestically, in India, we have significant fiscal expansion in 2020-21 and 2021-22. Therefore, it seems that bond yields have bottomed out, and the RBI is at the end of its rate cut cycle. From a fixed income perspective, we are presently positive on the shorter to medium term part of the yield curve.

How do you perceive the government’s borrowing programme for FY22?

The equity markets cheered the Budget. However, the bond markets have reacted negatively. Bond yields rose post Budget due to concerns of demand-supply mismatch on account of the large government borrowing. However, the RBI has reiterated its commitment to ensure availability of ample liquidity to support the nascent economic recovery and manage the high government borrowing program in an orderly and non-disruptive manner, which provides some comfort.

How are insurers managing investments amid the current demand for protection products?

Due to the market volatility and Covid-19 pandemic, we have seen a significant rise in demand for non-par savings or guaranteed return products and term plan products. Insurance companies have been using various instruments, including forward rate agreements, to hedge interest rate risk.

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ELSS vs ULIP: Which suits you best

Personal Finance

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Tick-tock, tick-tock — rushing to do your last-minute tax-savings before March 31. Two instruments always discussed during this time are equity-linked savings schemes (ELSS – tax-saving mutual funds) and unit-linked insurance plans (ULIPs – market-linked insurance plans). The Budget has put the spotlight on ULIPs with a key tax change. In this light, we re-visit the ELSS vs ULIP argument.

Construct

An ELSS invests at least 80 per cent of its assets in equity and equity-related instruments. Investments in an ELSS qualify for tax deductions under Section 80C of the Income Tax Act within the overall annual limit of ₹1.5 lakh. As a measure of popularity, ELSS, with 1.23 crore folios, is the largest equity fund category in the MF industry. The average investor account value, when it comes to ELSS, is ₹95,000.

On the other hand, ULIPs are a combination of insurance and investment offered by life insurers. ULIP premiums are also eligible for tax deduction under Section 80C. In FY20, ULIPs formed 18 per cent of the life insurance industry product mix, but constituted 44 per cent for the private sector. For top insurers, the average retail annual premium equivalent per ULIP was about ₹1.8 lakh in FY20, indicating their popularity among high-networth individuals (HNIs).

Insurance

ULIPs are marketed as a two-in-one product, but they are less of an insurance policy and more of an investment. If the maturity proceeds of a ULIP are to be tax-exempt under Section 10(10D), the insurance cover in the ULIP needs to be at least 10 times the annualised premium. This could be a relatively small life insurance cover for many as the cover should take into account your income and expenses as well as liabilities.

ELSS does not have any in-built insurance component. But fund houses such as ICICI Prud, Nippon India, ABSL and PGIM offer no-cost insurance cover (of up to ₹50 lakh) per eligible investor if you invest through a Systematic Investment Plan (SIP) for at least three years in the respective tax-saving fund. SIP insurance is free for ELSS investors. A few new-generation ULIPs refund the mortality charge if you stay put till maturity.

Taxation

At present, ELSS investments, like other equity fund investments, face 10 per cent long-term capital gains (LTCG) tax arising out of the sale of units if the LTCG exceeds ₹1 lakh in a financial year (gains up to January 31, 2018, being grandfathered).

Until now, there had been no capital gains tax for ULIP proceeds on maturity. A part of this tax arbitrage has been closed by the latest Budget, especially for high-income earners.

The Budget has proposed that ULIP maturity proceeds be taxed just like equity mutual funds if the annual premium is more than ₹2.5 lakh (implying a sum assured of about ₹25 lakh, going by the condition for exemption under Section 10(10D)) on new ULIPs signed on or after February 1, 2021. The tax, however, will not apply to sums received on the death of the insured.

A few grey areas arise here. One, while ULIPs with a premium of over ₹2.5 lakh will be taxed as equity funds, not all ULIPs are entirely linked to equities. ELSS schemes offer only equity portfolios, but ULIPs offer asset classes such as equity, debt, hybrid — portfolios comprising large-caps, mid-caps, balanced, income, bond, government securities, etc.

Two, now that there is no Section 10(10D) benefit for high- premium ULIPs, it remains to be seen how the premium versus sum-assured parameters change for policies which call for a premium of over ₹2.5 lakh.

Three, in mutual funds, ‘switching’ of investment in units within the same scheme from growth option to dividend option (or vice-versa), and from regular plan to direct plan (or vice-versa) is liable to capital gains tax.

However, switching of investments to/from investment plans to another within the same ULIP does not appear to be subject to capital gains tax, going by the Budget Memorandum.

Liquidity

Each investment in ELSS carries a lock-in of three years (each SIP is locked in for three years), which is quite low for equity investments.

One should invest with a greater time horizon of 5-7 years. Even if you don’t invest regularly, your existing ELSS investments are intact and earn market-linked return.

In the case of ULIPs, there is a five-year lock-in period. During this time, if you are unable to pay premiums upon expiry of the grace period, the policy is discontinued. The residual fund value, after deducting discontinuance fee, is put into the discontinued policy fund (gives 4 per cent pa) while any risk cover ceases to exist.

Investors in ULIPs can redeem the entire amount at the end of the five years even if the premium has been paid in instalments. In ELSS, only those units that have completed the three-year lock-in can be sold.

Costs

Regular plans of tax-saving mutual funds cost 1.6-2.5 per cent (total expense ratio) of the assets under management. Direct ELSS plans are cheaper. The 10-year lump-sum returns for regular ELSS plans range from 10 per cent to 18 per cent CAGR.

In ULIPs, if the policy term is 10 years or less, norms say the difference between the total return and post-cost return can’t be more than 3 per cent on maturity. If the policy term is over 10 years, the difference between the total return and post-cost return can’t be over 2.25 per cent on maturity. Based on just NAVs, the 10-year lump-sum returns for equity ULIPs range 6-17 per cent CAGR (pre-expenses).

Costs are coming down in new-generation ULIPs, with a few insurers removing premium allocation charges, refunding mortality charges, charging fund management charges on par with mutual funds, reducing/removing switching charges and premium allocation charges. Additionally, ULIPs are trying to sweeten returns with ‘loyalty additions’, ‘wealth boosters’, etc.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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