The insurance industry witnessed a lot of activity during the year. Although not many changes took place in terms of the basic structure of the industry, the industry grew by leaps and bounds.
So what really happened?
Let us take a look at some of the major happenings for the year 2004.
ULIPs on a rampage: Sales of Unit Linked Insurance Plans' (ULIPs) took a giant leap. To put things in perspective, ULIP sales accounted for a sizable amount of new business generated. This was primarily due to the bull run in the stock markets this year.
Obviously ULIPs with higher equity components posted fantastic returns. This fact was effectively conveyed by insurers through their agents/advisors. On their part individuals were swayed by the lucrative returns on high equity ULIPs ignoring their risk profile in the process.
Defined benefit (DB) v/s defined contribution (DC) debated: This year also saw the pension sector slowly but surely shifting towards a more manageable as well financially feasible policy of 'contributions' being fixed rather than the old norm of 'defined benefits' towards pension schemes where the governments were running into losses (or had the potential to do so in the future).
Varishtha Pension Bima Yojana (VPBY) of LIC discontinued: The VPBY of the LIC was discontinued from this year. Instead, the Senior Citizens Savings Scheme was launched offering a rate of return of 9%.
The only (and probably an important one) difference in the new scheme was the limit of approximately Rs 266,000 was increased to Rs 1,500,000. This, in our opinion, has been a positive change as far as retirement planning is concerned.
What does the future hold?
ULIP sales set to grow further: If the equity market rally sustains, we could well see a scenario wherein individuals will likely purchase ULIPs. Most will take ULIPs that do not suit their risk profile. Almost all will have no idea about the exorbitant cost of owning a ULIP.
A word of caution for individuals investing in ULIPs. Do not get swayed by the lucrative returns on high equity ULIPs ignoring your own risk profile in the process. At Personalfn, we have come across clients who were victims of the hype created by ULIPs.
They invested in ULIPs with a high equity component, without having an understanding of the product. Most of these clients had no idea of the cost of buying a ULIP, which incidentally does not compare well with a mutual fund scheme with a similar investment objective.
Increasing acceptance of variable returns as well as term plans: The last few years have been a watershed for assured return plans. As the insurance sector has developed, there's been a growing acceptance by most policyholders that the assured return era is a thing of the past.
This in fact has also been one of the reasons why many investors have shifted to market linked plans. Another positive change has been the increasing level of people buying term plans.
This is good from a policyholder's perspective as a term plan offers a higher sum assured at a minimal cost. This was not the case till a couple of years ago.
Tax reforms: Insurance-related tax reforms are another issue that may see the light of the day. The Kelkar Committee has consistently recommended the discontinuation of Section 88 tax rebate benefits. In such an eventuality insurance premium may no longer attract a tax rebate.
The good news is that if the insurance industry's demand to raise tax benefits on pension is accepted, Section 80CCC tax benefit could appreciate from the existing level of Rs 10,000.
Annuity/pension schemes to see more inflow of investments: With the setting up of an interim pension fund regulatory and development authority (PFRDA), annuity/pensions are all set to see higher investments coming in.
Private fund managers will now look after investments in pensions. Individuals will also be allowed to switch freely between fund managers to park their funds with the one who maximises their returns.
Although only 50,000 employees have been covered in the initial year, this number is sure to go up in the coming years. This is also due to decreasing real rate of returns on investments and in effect, having a lesser corpus to fall back on post-retirement.
Our wish list
Term plans a must-buy: Our advice to investors at the outset would be to definitely give term insurance a look-in. We say so as term plans give maximum (returns) at minimum cost (premium). This plan can co-exist very well with the other investment avenues.
Retirement Planning: With the setting up of the pension fund regulatory and development authority (PFRDA), the future of pension schemes presumably seems to be in good hands.
We would like to see investors investing more money into pension/annuities than is currently being done. Other than the obvious Section 80CCC benefits, this also takes care of the high (and mostly unavoidable) expenditure post retirement.
