Dubai It did not take long for investment-specific insurance products to take the fall from being viewed as the next big thing for NRI investors to its present status as an also-ran. To assign blame one need not look any further than the Recession and the stock market meltdown that came in its wake.
Given that investment-specific insurance products need a buoyant stock market to make a pitch to prospective investors, and retain existing ones, the continued volatility in stocks have hit insurers and the insured hard.
“Even after five years, the (Indian) stock market is not showing signs of gaining momentum towards growth and because of this insurance companies are not able to show good growth opportunities through existing products,” said Alok Kumar, who heads the UAE operations of LIC, India’s insurance behemoth. “Global cues too are not positive.
“Besides, to attract foreign funds and to curtail the burgeoning current account deficits, the Indian Government started offering high interest rate – of (9 to 10 per cent - fixed deposit options to resident as well as NRI bank accountholders.
“This has also pushed investors farther away from the investment specific insurance products.”
In their heydays, investment-specific insurance products were seen as an attractive option by investors to counter inflation and park funds for shorter durations, typically round two years. There were also tax incentives that could be tapped through such investment exposures.
Now, even on the tax incentives side there is some drag. In India’s Finance Bill for 2012, a new stipulation requires that the premium on insurance policies must be below 10 per cent of the sum insured for a tax break. This is the case for all insurance products. This has come as another blow for an already woeful state of affairs for investment-linked insurance products?
So, is an insurance-specific investment currently a dead end for NRIs? “My personal opinion, the best time to enter into market-linked investments is when they are offered cheap or at a discount,” said Kumar.
“It applies to any product related to the stock market, be it indirect purchases like Insurance, mutual funds or direct purchases like shares. But the problem is the timing of the investments, i.e., when to enter and when to exit and which are the right kind of investments on offer.
“Besides, with insurance-linked investments you should always plan medium to long term, not short term, and then it can give you very attractive returns.”
Even with seemingly everything going against them, unit-linked investment products still constitute anywhere around 60 per cent in terms of premium income collected in India. Globally, such products represent more than 70 per cent. And when the markets were on the up, their contribution swelled to even 90 per cent.
It is clear that such products are not about to go off radar completely. But prospective NRI buyers will do well to do their homework well and be prepared to show a lot of patience when it comes to such investments.
“In unit-linked insurance products, the key differences between global and Indian products is the currency,” said Siddharth Razdan, chief operating officer at Insighters Insurance Brokers.
“Global unit-linked products offer diversification as also the benefit of cost averaging and are geared up to meet specific needs like retirement, marriage, education, etc. and are typically of a 10-20 year horizon. As such, these are not strictly not comparable with other investment products which are mostly well under 10 years.
“Also, in India the option of funds tends to be limited and restricted to Indian equities and fixed-income products.
“Also, global products are without any income tax implications for UAE residents.”
There is merit in Razdan’s observations. Belying many a punter’s expectations, the Indian stock markets did not get the kind of expected lift post last week’s Diwali, which could indicate deep-rooted concerns over economic fundamentals and indifferent corporate results.
If that is the case, the NRI investor still interested in a broad asset allocation and featuring investment-specific insurance products, patience has to be a virtue.
ULIPs: it’s importance
Why should investors seriously give a thought to unit-linked insurance products?
“ULIPs can beat inflation, take care of your expenses towards insurance, offer a variety of options in the same product, profit bookings, easy withdrawal as well as medium- to long-term options,” said Alok Kumar of LIC International.
“Actually, the benefits outnumber the shortcomings; but times like these try to keep you on-guard that we should not expect very high - and unexpected - returns. The greed for very high returns only invites all sorts of problems.
“This element of greed throws away all curtains of discipline resulting in a situation where we are in at the moment.”