Unit Linked Products – Cap on Charges

July 22, 2009





Unit Linked Products – Cap on Charges



IRDA had issued a circular on December 21, 2005 regarding various aspects of ULIPs and later issued another circular (dated January 25, 2008) regarding benefit illustration. As of today, almost all insurance companies have a number of ULIPs and under each product there are various charges which are recovered from the contribution or from the fund value. In order to enable the customers to have a clear understanding of the product and to comprehend various features of ULIPs, it is decided that IRDA will prescribe one cap on all charges put together. This will also impart flexibility for the insurers and encourages further product innovation.

Insurance products are long term saving vehicles and the policy prescriptions should help the customers’ to move towards long term savings cum protection rather than short term one.

Taking into account the above objectives, IRDA has prescribed the cap on charges. This cap is expressed in terms of the difference between the gross and net yield to the customer. The net yield is the gross yield adjusted for all charges. For insurance contracts which are of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.

IRDA has issued a circular to the life insurance industry on 22 nd Jul, 2009 and this circular also contains the other features which must be observed by the insurers.

The circular comes into effect from October 1, 2009 so that all products which are approved by the IRDA on or after October 1, 2009 will be governed by the provisions of this circular. All existing products that do not meet the requirements of this circular should be withdrawn or modified by 31 st December 2009.

Sd./-

(R. Kannan)
Member (Actuary)

Life Insurance Products clearance position as on 23 rd December 2009

IRDA/ACT/PR/PRD/088/12/2009



Life Insurance Products clearance position as on 23 rd December 2009



Consequent to our circular on ‘cap on charges’, life insurers have been asked to modify the existing products, which do not satisfy the contents of the above mentioned circular. We have asked insurance companies to submit the revised ‘File & Use’ applications on or before 1 st December, 2009. Please note that all products which are sold in the market on or after 1 st January, 2010 must comply with the features indicated in the above mentioned circular.

We have received around 230 ‘File & Use’ applications including riders. As on the close of business of 23 rd December, 2009, 186 products including riders were cleared and 17 products will be processed in the next 2 days. 27 products are with the insurers for their replies to the queries which we raised.

We have also received 14 products after 1 st December, 2009 and it is our endeavor to clear all the products on or before 31 st December, 2009 so long as the products satisfy the norms.


Sd/-
(R. Kannan)

The amendment to LIC Act

The amendment to LIC Act



On December 23, 2008, the government introduced in Parliament a Bill for amending the Insurance Act, to raise the capital of the Life Insurance Corporation from Rs. 5 crore to Rs. 100 crore. On the face of it, the intention behind the proposed amendment may appear to be good. Unfortunately, it is not so.

Needless exercise


It is a recognised fact that a life insurance company does not require any capital. There were, and still are, many life insurance companies known as Mutuals. Standard Life of the U.K. (which operated in India even before 1900 and is now again in India in partnership with Housing Development Finance Company) was a mutual company till June 30, 2006. In India itself, Bombay Mutual, before nationalisation of insurance, was a well known example. The mutual companies have no capital — only working capital, during initial years. Policyholders are the owners of these companies and the entire profit, after tax, goes to them.

The Rs. 5 crore provided by the government at the time of formation of LIC was more in the nature of working capital than real capital. Today, the Controlled Fund of LIC exceeds Rs. 7 lakh crore, with a solvency margin reserve of more than Rs. 30,000 crore. This reserve, built up by transfers from surplus (profit) after tax, is akin to general reserve and, therefore, for all purposes, equivalent to capital, but with one difference. Ninetyfive per cent of this capital belongs to policyholders.

With policyholders thus providing almost 95 per cent of the capital, LIC is virtually a mutual company. In this context, an addition of Rs. 95 crore to capital is a drop in the ocean and serves no purpose, except perhaps to facilitate passing of a part of the business to the private sector, Indian and foreign.

Can a minority shareholder unilaterally alter the capital structure of a company? This question has to be first answered before the bill, in its present form, is taken up for discussion in Parliament.

As per the LIC Act, the Central government is not eligible for more than five per cent of the valuation of surplus emerging each year. This was in line with the standard set up by Oriental Assurance Company before nationalisation. In the case of private insurers, as per the Insurance Act, the shareholders are eligible for 100 per cent of the surplus emerging from without profit policies and 10 per cent of the surplus emerging from with profit policies. The unit linked policies come under the without profit category. With these policies constituting more than 95 per cent of the portfolio of private insurers, almost 98 per cent of surplus goes to shareholders in the case of private insurance companies.

Policyholders to suffer


If the proposed amendment to the LIC Act goes through, the shareholders’ share of profits of LIC will immediately jump from five per cent to 10 per cent and then gradually increase, during the next ten years, to more than 40 per cent. That is, within the next ten years, even assuming only a modest growth rate, the shareholders of LIC would get more than Rs. 15,000 crore a year, or Rs. 1,250 crore a month, as compared to the present level of Rs. 1,000 crore a year. This, at the cost of policyholders.

These figures would explain the objective behind the proposed amendment.

Such a move to siphon off the profits of LIC will result in enrichment of private pockets, drastically reduce the levels of bonus to policyholders, render the corporation uncompetitive and eventually weaken it beyond recognition. Simultaneously, the demand to withdraw government guarantee to LIC has been resurrected. The government can be allowed to withdraw the guarantee but, on one condition. Convert the LIC into a mutual company and make the policyholders, who have contributed 95 per cent of the capital, the owners.

The amendment to the Insurance Act made in 1999 has conferred on us a distinction. After this amendment, India is perhaps the only country not to allow formation of mutual insurance companies. But, this position can be easily rectified through a minor amendment to the Act. In this context, it is worth mentioning the view held by the International Association of Insurance Supervisors (IAIS). According to this body (not binding on member states), an insurance company can be either a joint stock or a mutual company.

For giving up its control of LIC, the government may be compensated through payment of a fixed sum, say Rs. 1,000 crore a year, for the next 20 years. One may feel that the quantum of compensation is high. But, the price of freedom always is.

If such a scheme is implemented, it would result in immediate increase in the levels of bonus to policyholders, making LIC a much stronger organisation.

In 1993, a national survey was got conducted by the Malhotra Committee, spanning cities, towns and villages. The survey showed that LIC’s emblem was readily recognised by more than 99 per cent of the persons covered by the survey. The LIC is not just a national institution. It is a symbol of national integration and its emblem is treated as a symbol of security. It is the duty of every right thinking Indian to stand up against any attempt to dilute this status.





R. RAMAKRISHNAN
Actuary


http://www.thehindu.com/2009/01/12/stories/2009011250031600.htm

The Importance of Planning for Your Future

The Importance of Planning for Your Future - Top 3 Reasons why Financial Planning is Key

Many years ago, you were born. You learned life lessons and you made a couple of mistakes, but all in all your parents raised you to become a decent human being. You chose a career, you saved some money, and then you started a family of your own. With college funds open and growing for your 2-year-old twins, you've realized by age 35 that everything in your life revolves around your keen financial planning for the future.

The following are the top three reasons why you are correct; it is highly important to plan for your future to insure:

1. Protection of your family members
2. An easy transition for your family if you suddenly pass away
3. A guaranteed financial benefit for you and/or your family regardless of what happens

Insuring the protection of your family members: One day you invest in a life insurance policy because you've heard the stories of sudden death in a family, leaving the grieving children with the unexpected burden of their parent's debt and funding a proper funeral. You know that you're a better planner than grandpa Joe and that you would never want to burden your mourning family by the abrupt loss of your income. In situations where a prominent family member's income is suddenly terminated, it can be traumatizing for the rest of the family, especially if there are children involved.

The end result could be a forced selling of the home and other assets that were not yet purchased in full. Sometimes the sheer burden of yearly taxes on a large piece of property can be burdensome enough for a family to bear once an expected salary disappears from the income. Life insurance exists to prevent families from being stuck in situations such as these.

Insuring an easy transition for your family if you suddenly pass away: Property aside, a huge concern of yours is the guarantee of continued happiness of your family if something unexpected should happen to you. After all, Kimmy and Jimmy seem to have grown quite accustomed to the Baby Gap – wouldn't want to destroy the hopes, dreams, and comfortable standard of living that your hefty lawyer salary has been providing for your family.

The money sitting in Kimmy and Jimmy's college funds shouldn't be cashed in for emergency food money when they're 14, but if you're gone then there might not be a way to promise your children the lives you intended for them to have and that you worked so hard to plan for.

There is a guaranteed benefit for you and/or your family regardless of what happens: People purchase life insurance to protect their family members, allowing the family to maintain a standard of living, maintain the home, and fund the education of their children। It can also be used simply to insure an easier transition for the rest of the family at the time of the policyholder's death. However, planners in the past have been deterred from investing in life insurance policies because there was no promise of a return investment should the policyholder live a long and healthy life.

Well little Kimmy and Jimmy will grow up and build their own lives, and with time, you may find that it is more of a financial difficulty to maintain your insurance premium than back when you were winning lawsuits. With time, your policy could become more of a burden and less of a mode of protection for your family. Your nine grandkids are throwing you an 80th birthday bash next week at Kimmy's Malibu mansion; clearly the financial protection is no longer needed. Nowadays, your policy can be sold in a secondary marketplace where the policyholder benefits financially by selling their policy for cash.
The amount of cash your policy is worth is determined by your current life expectancy and overall health, and your life settlement will ultimately be based on a calculation. The end result is always a cash settlement yielding more money for you to spend while you are still alive than the amount of money that you had previously invested in the policy you chose many years ago.
Your family deserves protection and financial stability, and you, the investor, deserve the peace of mind that comes with knowing you are safely investing in your family's future. The system of obtaining cash for life insurance settlements is what makes current investments safer than they used to be. In the end, you can rest assured that the 35-year-old who knew back then that financial planning was smart, safe, effective, and beneficial was 100% correct.

8 things your financial planner won't tell you

8 things your financial planner won't tell you

Literally anyone can claim to be a financial adviser. Even those with top credentials may not divulge everything you should know. Here's how to dig up the facts on the person you're paying for financial advice.

More people are flocking to financial planners these days, convinced they need professionals to help them navigate the market's stormy seas.

Unfortunately, not all planners are created equal. Some are thinly disguised investment salespeople, and many don't have the background or inclination to offer true, comprehensive financial advice.
So before you sign on with a planner, or implement the advice offered, make sure you know these secrets the planner may be keeping. Such as:
1. I have no qualifications for this job.
Anyone can claim to be a financial planner. There are no education, experience or ethical requirements and no government agency that regulates planners as planners.
Of the estimated 250,000 people calling themselves financial planners, only about 56,500 have earned the Certified Financial Planner mark -- the best-known financial planning designation. Fewer still are a Chartered Financial Consultant (ChFC) or Personal Financial Specialist (PFS), the financial planning designations offered by the insurance and accounting industries, respectively.
Even if your planner has one of these designations, you're not home free. It generally takes years of experience and ongoing education -- not to mention integrity and ethics -- to become a truly good planner.
Your best bet: Make sure that, at a minimum, your financial planner has one of the three leading designations. You can check on CFP status by consulting the Certified Financial Planner Board of Standards.

2. I have no obligation to put your interests ahead of my own.

Real financial planners take seriously their duties as fiduciaries -- professionals who are trusted to think of their clients' needs first and foremost.

Most of those who call themselves planners, though, are really in the business of selling investments. As such, they may face scrutiny from various government agencies over their sales tactics. But instead of being obligated to create the best financial plan for you, they're only required by law not to sell you something that's utterly unsuitable.
Your best bet: Ask for, and read, a copy of any code of ethics with which your planner is required to comply (usually as part of his professional designation). It may be slow reading, but you'll get an idea of the standard by which your planner operates. The word "fiduciary," for example, does not appear in the Society of Financial Services Professionals' code of professional responsibility, but members of the fee-only National Association of Personal Financial Advisors are required to take a fiduciary oath promising "to act in good faith and in the best interests of the client."
3. I'm not being paid the way you think.
"Commissions" became a dirty word in the 1990s, when even the big brokerage houses like Merrill Lynch decided that people would rather pay fees than have advisers compensated by commissions for the investments they sold.
True fee-only financial planners are still a rare breed, however. The leading association for fee-only planners, NAPFA, has fewer than 800 members.
Most financial advisers still get some or most of their income from commissions, according to FPA. Many finesse the situation by calling themselves "fee-based" planners, or by simply avoiding the issue of how they get compensated.
Commissions aren't bad, per se. But they do create a built-in conflict of interest. Your planner should volunteer information about how she gets paid. If you have to ask, you should at least get a straight answer.
Your best bet: Ask -- and then do more research. If your planner is a registered investment adviser (RIA), ask for a copy of his form ADV, Parts I and II. This document, which must be filed with the Securities and Exchange Commission, outlines whether the adviser accepts fees, commissions or both. If the adviser's practice is too small to be regulated by the SEC, ask for the state equivalent of this form.
http://articles.moneycentral.msn.com/RetirementandWills/CreateaPlan/8ThingsYourFinancialPlannerWontTellYou.aspx

Personal Financial Planning: Importance

Personal Financial Planning: Importance

Financial planning is not the same as financial advice. It is not a recommendation to purchase a particular product but an evolving action plan, regularly reviewed to ensure that your goals are met.

The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan on how you can meet your goals given your current and projected situation.

In practice this strategy will utilize available tax allowances, target liquid assets into appropriate vehicles, ensure your investments are structured correctly and managed professionally. Having created a plan you will be able to understand how each decision you make affects other areas of your finances and you can consider the short and long term effects on your goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

However, the true objective of financial planning is to ensure that this strategy is not neglected and its value is not diminished. Only through regular reviews can you ensure that you remain on track to meet your goals and maximize new ideas and opportunities.

What Does We Believe?

The achievement of our client's long term goals is a measure of our success. We create winning strategies through a set of firmly held beliefs.

Our beliefs:

Needs drive the investment process

It is your needs, aspirations and concerns that must determine your financial and investment strategy. We cannot and will not force predetermined products and investments on you. Instead we will tailor-make a strategic financial plan to meet your goals and objectives.

Strategy comes first—products come second

Experience has shown that simply purchasing financial products is not a recipe to financial well-being. It is important that all assets and arrangements complement each other within a co-ordinated strategy designed to meet specific goals.

Understanding risk is key

At the heart of investment management is one core truth: the relationship between risk and reward. There are many different investments and each one offers a different balance between risk and reward. Rowan's investment practice ensures investors understand risk and the opportunities it can provide.

Diversification reduces uncertainty

Investors can reduce their potential for loss by investing in a basket of different asset classes and markets. Equally, by adopting a multi-layered planning strategy we can seek to reduce the risk of future legislative and taxation changes.

There is no substitute for thorough research

In-depth research and analysis has never been more important. We focus our attention on each fund manager's investment beliefs, the application of these beliefs in practice, the track record of the fund and its likely future performance. The research is intensive and in addition to the analysis of the fund performance this also involves detailed interviews with fund managers.

The Importance of a Financial Advisor

The Importance of a Financial Advisor

Professional Experience

When you want a job done right, you usually hire a professional to get the best results. The same can be said for managing your finances. While you may have some ideas about what types of investments to own, a financial advisor can offer you the professional expertise and insight that you may not have. Magazines, cable television and web sites produce a wealth of investing information on a daily basis, but do you really have the time to evaluate it all to make the best investment decisions?

Evaluating Investments

If you're a new investor, a financial advisor can help you determine the proper asset allocation to fit your lifestyle. If you currently have an investment portfolio, a financial advisor can evaluate your existing investments and determine if they are still appropriate for meeting your short- or long-term goals.

Managing Investments

If you think you can manage your investments on your own, answer these questions, then decide if you should get a second opinion. Remember, a financial advisor has the time, knowledge, research tools, expertise and experience that you may not have. After all, investment planning is his or her full time job.

Answer These Questions

• Have you utilized asset allocation effectively?
  
• Do you know enough about all the individual stocks, bonds, mutual funds and money market funds to choose your investments wisely?
  
• Is your investment portfolio diversified enough to give you the best potential results?
  
• Do you have enough time to review your investments periodically to determine if you should reallocate your investments?
  
• Have you spoken with a tax advisor to determine if you're getting the most out of your investments?
  
• Are you secure enough with your investments to "stay the course" even in changing market conditions?
  
• Is your investment portfolio overweighted in a particular stock, sector or asset class?
  
• Do you think you can effectively "time" the market by always buying low and selling high?
  
• Are you taking advantage of the power of compounding?
  
• In case of an emergency (loss of job or sudden medical expense), do you have enough cash on hand to pay your bills without having to cash out at a lower price?
  
• Are you aware of the constantly changing tax laws and how they can impact your investments?
  
• Have you considered taking advantage of dollar cost averaging?*
  
• Are you able to take advantage of both taxable and tax-exempt investments?
  
• Do you understand how economic factors such as interest rates, unemployment, housing sales, inflation and productivity impact the economy, the stock market and your investments?
  
• Will you be prepared to pay for your children's college education and your retirement?
  

If you answered "no" to a few of these questions, perhaps you should consider working closely with a financial advisor to help you make the most informed investment choices for your personal situation. If you don't have a financial representative, we can help you find one.

*Rupee cost averaging does not assure a profit nor protect against loss in a declining market. Since this strategy involves continuous investments in securities, regardless of fluctuating prices, investors should consider their financial ability to invest during periods of both high and low price levels.

Planning Process

Point4Future:
Planning Process

We do not believe we have the right to 'tell' you what to do with your money. Instead our planning process will educate and help you understand the decisions you make.

The 'Point4Future Planning Process' consists of the following six steps:

1. Introduction & Instruction

We will explain and document the services to be provided, including details of how we will be paid and by whom.

2. Discovery

Point4Future advisers will take the time to understand your hopes, aspirations and concerns. In turn you will be required to provide information about your assets, liabilities, income and expenditure.

If necessary we will also determine exactly what your existing arrangements are; obtaining with your permission further information directly from your current providers.

3. Analysis & Evaluation

Point4Future will analyze the collated information to assess your current situation and determine what action needs to be taken now and in the future to meet your goals.

4. Creation & Presentation of a Strategic Plan

Your adviser will present their findings and recommendations to you in the form of a written financial plan. This will quantify exactly how close your existing arrangements come to achieving your financial objectives and identify areas of weakness and vulnerability.

Once you have had the opportunity to consider your plan we will discuss it with you personally, helping you understand the recommendations and the rational that sits behind them, whilst addressing any concerns you may have.

5. Implementation

Point4Future will then agree on how best to implement the recommendations. Where appropriate we will co-ordinate the whole process with you and other professionals such as your solicitor and/or your accountant.

6. Review

Finally, you will determine how your strategy will be reviewed, updated and adjusted, if needed, as your life changes

What is the Cost of Advice:

Before we undertake any work on your behalf we will clearly explain and document the cost of the services to be provided.

We believe our clients for whom we act should understand and appreciate the cost of our services. We also believe it is important that we offer flexibility through a variety of payment options and these are outlined as follows;

Fees

Whether or not you purchase financial products through us you will pay a fee for the advice provided. Should we also receive a commission from a product provider we will pass on the full value of that commission to you either by reducing product charges or refunding the commission to you.

Commission

If you purchase a financial product as part of our advice we will normally receive commission from the product provider. Although you do not pay a fee this does not mean that our service is free. Instead you will be paying for our services indirectly through the product's charges. We will tell you how much the commission will be before we implement our recommendations.

Paying by a combination of commission and fee

It is possible to agree a fee for the work involved and use any commission received to offset the fee. If the commission received is higher than the agreed fee we will pass on the balance to you either by reducing product charges or refunding the balance commission to you. Equally, we will also ask you to make up any difference should the commission received be less than the agreed fee.

 

Services:

Investment Management

A properly thought through and balanced investment strategy will have the potential to grow your assets and generate income (if required) whilst letting you sleep soundly at night. However deciding which investments are suitable is far more difficult than it would first appear.

There are literally thousands of investments to choose from and each offers you a different balance between risk and reward and each may perform differently in any one particular economic environment. A simple investment 'truth' should always be remembered, that is the relationship between risk and reward. Generally the greater the potential reward the higher the risk of loss.

For this reason our investment practices give you the ability to understand risk and the opportunity that risk can provide. They are designed to enable you to make an informed choice as to which asset types are the most suitable and to combine these various asset types into a portfolio properly structured to meet your objectives.

The ability to combine asset classes can create portfolios with a wide range of risk/reward characteristics. If equities are too risky, you may prefer to balance your investments by having limited exposure to equities in favour of a larger exposure to less volatile asset classes, such as property or fixed interest.

Consequently, whatever your investment objective and risk profile there will be a suitable portfolio strategy. We can provide that portfolio and through detailed investment research select the best from the thousands of investments available to meet your requirements.

For example, an investment that has achieved excellent short term performance has risked substantial loss in the process. This type of investment can be very rewarding but how much should you invest in it? When should you buy it? And perhaps most importantly, when should you sell it? These are some of the questions that need to be considered. Investing at the wrong time, investing the wrong amount or not selling can make the difference between a very good investment return and a mediocre return. Buying investments without recognizing the associated risk can too easily result in poor performance, unexpected fluctuations in value and ultimately, disappointment.

Planning for your retirement

Planning ahead lets you enjoy the retirement you deserve. The retirement strategy you decide upon now makes a fundamental difference to the degree of financial freedom you'll experience when you do decide to take your pension.

Planning for your retirement and choosing a pension strategy to safeguard your financial security can be a minefield. In the last few years, there have been many changes; the "volatility" of the stock market, reduction of final-salary pension schemes, the rise of buy-to-let property portfolios and changes in taxation and pension legislation. These changes underline the importance of both setting a retirement plan in place and of keeping it up-to-date.

We can help you understand the different retirement strategies and implement a successful retirement plan - taking into account the recent substantial changes in legislation.

Retirement options

With life expectancy increasing the decisions you make when you stop or reduce work are likely to have an impact for much longer. You should therefore look to adopt a strategy that could be required to support a varying lifestyle for many years to come.

As a result of changing lifestyles and expectations there have been a number of changes to pensions legislation which came into effect in April 2006. These mean that you will have greater flexibility to use your pension benefits:

Allowing higher maximum contributions into pension funds

Removing restrictions on the level of income that can be taken from a pension fund

Allowing you to keep working whilst drawing part or your pension if you want to

Protection

It is important that any plan or strategy is protected from unforeseen circumstances such as redundancy, sickness and death.

We will endeavor to ensure that your financial plan is as robust as possible and is able to withstand the implications of personal misfortune.

There are a number of products designed specifically to provide financial help if you fall ill, are diagnosed with a critical illness or die.

We will assist you in choosing the right type of policy, level of cover and, most importantly, get you value for money.

It is equally important to ensure that you are not over-insured and wasting valuable income. We will as part of your strategic plan only recommend policies where they are appropriate in ensuring your long term goals are met.

Point4Future Profile

Point4Future Profile

Srinivasareddy (Director)

Graduating from Bharati Vidyapeeth Deemed University in 2002, with Bachelor's degree in Optometry, went for M.Optom at University of Bradford, in UK. Returning from UK started OptoVision, a firm specializes in A-Z solutions of Eye care. Taking a challenge of understanding stocks for self management, found fancy and rupees in market abundantly, turned to full time Financial advisor in 2007. Currently handling more than 500 satisfied customers on 1-1 basis. Srinivasareddy is one of the very few advisers in the Prinicipal Mutual Fund selected as the best. Srinivasareddy has been an Optometrist of the transition to professionalism in Financial Services, establishing and chairing the PinPoint Financial Solutions.

A recognised and duly authorised Advisor specialized in Life Insurance,Mutual Funds and Stock Investment.