At a meeting of the Life Insurance Council last month, the country’s 21 insurers have decided not to sell their products to mutual fund houses to prevent the latter from bundling insurance schemes with their investment plans.

Insurers, however, are not opposed to selling group covers to banks, which can bundle an insurance scheme with their savings or loan products.

Globally, combo products have always found greater favour with customers than standalone products because of the convenience and cost advantages that come with them.

For example, after the introduction of unit-linked insurance plans, companies started minting money.

Sales of Ulips have been growing at a fast pace. Within a span of three to four years, these schemes generate 85 to 90 per cent of new premium income from individual policies.

In banking products, housing loans bundled with mortgage-reducing term assurance covers have been a big hit over the last few years.

Public and private sector banks admit that more than 60 per cent of their retail housing loan disbursals are now secured with mortgage-reducing term assurance.

Personal accident protection, life cover and health insurance are other add-ons with which banks are trying to woo customers.

So, the Life Insurance Council’s decision not to sell group insurance products to mutual fund houses would mean a loss for retail investors at the most.

Why the decision?

Mutual funds houses have been criticising insurance companies for selling investment products in the garb of insurance products.

A Ulip can be described as a mutual fund scheme with a life insurance cover.

The investment risk in these products is borne by the policyholder as against the insurer in a traditional insurance plan.

Since the investment risk is borne by the policyholder, the insurer needs to keep aside less capital to meet the solvency margin.

The premium cost is also higher in the case of a Ulip than a traditional plan. For example, the annual premium for a 30-year old buying an endowment assurance plan from HDFC Standard Life having a sum assured of Rs 5 lakh for 20 years would be Rs 23,575. But if one wants to buy a unit-linked endowment plan from the same insurer with the same annual premium, the minimum sum assured will be only Rs 2,35,575.

If one wants to increase the sum assured in the Ulip to Rs 5 lakh, deductions towards mortality charges will increase and the insurer will recover this amount by knocking off units in the accumulated fund. In other words, one’s fund value will decrease.

In most cases, insurers have put a minimum annual premium for their Ulips to increase the average premium ticket size.

Ulips, thus, bring manifold benefits for insurers — lower risk, more premium income and less capital to support business growth.

Charm factor

When mutual funds began offering “free” life cover on some of their schemes through the systematic investment plan (SIP) route, the product became more attractive to retail customers than Ulips from a cost perspective.

Some asset management companies, having a group company in the life insurance business, bought group term assurance at low cost and offered the life cover to their customers “free”.

The insurance cover was, however, available to investors parking money with mutual fund units only through the SIP route.

For retail investors, such products were cheaper because they would have to pay only 2.25 per cent entry load to buy mutual fund units instead of hefty charges in Ulips (30 to 40 per cent in the first year, 7.5 to 9.5 per cent in the second and third year and 1.5 to 2.5 per cent in the succeeding years).

Moreover, if investors had bought units directly from the fund house, they won’t have to pay any entry load.

The way out

The question is what should investors do now that the mutual funds won’t sell insurance cover with their investment schemes.

The alternative is to buy a term assurance cover with the money that investors save on entry load by purchasing the mutual fund units directly from the fund house.

Let us illustrate this. Suppose, one has decided to invest Rs 5,000 every month in a mutual fund scheme through the SIP route for five years.

If one buys the units directly from the fund house, one won’t have to pay the entry load worth Rs 1,350.

Now, a term assurance cover of Rs 5 lakh for five years would cost a 30-year-old person Rs 1,282 if bought from Life Insurance Corporation, Rs 1,460 if bought from HDFC Standard Life, Rs 2,000 (for a 10-year term) from Religare Aegon Life, Rs 1,405 from Max New York Life and so on.

Thus, one can protect one’s total investment of Rs 3,00,000 over the five-year period in the mutual fund scheme with the money that one saves by not paying entry load by directly purchasing the units from the fund house.