Buying a market-linked insurance plan could turn out to be much cheaper than investing in a mutual fund, if an investor is willing to wait for over 10 years.
Most Indian investors however, do not understand that higher ULIP charges stem from the higher distribution costs involved vis-à-vis mutual funds, said Rajesh Sud, CEO of Max New York Life Insurance. Speaking at the Sunday ET CEO Rountable on Personal Finance, Mr Sud said price was the main differentiator in the Indian market and that investors failed to realize insurance and mutual funds played different roles in their portfolios.
For investors who felt cheated as a result of the high charges or price differentials within the insurance space, Mr Sud admitted that standardization of prices went against the grain of the industry. However, he indicated that there was a move towards setting a cap on the overall charges that insurance companies could levy on their customers (excluding mortality charges).
He added that accusations of hidden charges in market-linked insurance products were unfounded and that insurance companies were highly transparent in comparison to other financial products, especially as they were forced to make disclosures by the regulator.
According to Mr Sud, the fundamental issue in India was that individuals did not really know their needs or what they were buying. Hence, they approached companies with demands for insurance cover of Rs 50 lakh even when they didn’t have enough money to back it up.
Instead they could rely on thumb rules to assess their insurance needs based on annual income, number of working years left or even monthly expenditure. An investor could, for instance, consider necessary insurance cover as being worth five to ten times his annual income.
Mr Sud also said that while the fundamental needs of investors had not changed in the last 18 months, it was critical for them to understand the importance of upfront planning for the downside scenario. Investors needed to take responsibility for their wealth and to create an investment plan which would provide direction for their actions.
Instead of blaming others for their problems, they needed to be careful of who they were betting on, be it an institution or an adviser. He encouraged investors to refrain from following the herd mentality vis-à-vis entering or exiting the markets and to follow the old-time maxim of conservatism regarding what they did not understand or what risks they were not sure they were willing to take.
Most Indian investors however, do not understand that higher ULIP charges stem from the higher distribution costs involved vis-à-vis mutual funds, said Rajesh Sud, CEO of Max New York Life Insurance. Speaking at the Sunday ET CEO Rountable on Personal Finance, Mr Sud said price was the main differentiator in the Indian market and that investors failed to realize insurance and mutual funds played different roles in their portfolios.
For investors who felt cheated as a result of the high charges or price differentials within the insurance space, Mr Sud admitted that standardization of prices went against the grain of the industry. However, he indicated that there was a move towards setting a cap on the overall charges that insurance companies could levy on their customers (excluding mortality charges).
He added that accusations of hidden charges in market-linked insurance products were unfounded and that insurance companies were highly transparent in comparison to other financial products, especially as they were forced to make disclosures by the regulator.
According to Mr Sud, the fundamental issue in India was that individuals did not really know their needs or what they were buying. Hence, they approached companies with demands for insurance cover of Rs 50 lakh even when they didn’t have enough money to back it up.
Instead they could rely on thumb rules to assess their insurance needs based on annual income, number of working years left or even monthly expenditure. An investor could, for instance, consider necessary insurance cover as being worth five to ten times his annual income.
Mr Sud also said that while the fundamental needs of investors had not changed in the last 18 months, it was critical for them to understand the importance of upfront planning for the downside scenario. Investors needed to take responsibility for their wealth and to create an investment plan which would provide direction for their actions.
Instead of blaming others for their problems, they needed to be careful of who they were betting on, be it an institution or an adviser. He encouraged investors to refrain from following the herd mentality vis-à-vis entering or exiting the markets and to follow the old-time maxim of conservatism regarding what they did not understand or what risks they were not sure they were willing to take.
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