One of the newsletters that I read recently had this to say about insurance policies in the US: "Advisors are beginning to discover some of the games that the larger life (insurance) companies have played with the nearly-opaque inner workings of their products, lots of undocumented charges and fees, higher-than-necessary cost of death benefit coverage that the companies simply put in their pocket with hardly a 'thank you'."
However, awareness of these issues has begun seeping in with some consumers who had bought unit linked insurance policies several years ago. In fact, insurance policies in developed markets such as the US are moving towards an interesting tipping point.
These issues have resulted in the development of an international product called 'Intelligent Life' that eliminates the high costs that come with most of the insurance products.
These policies can be sold without a commission. Though, this is a very tiny part of the US life insurance industry at present, it is a matter of time before other insurance companies in the US and, hopefully in India catch up on this idea.
With the traditional ULIP policy, an agent sells a policy with an existing premium in mind, based on the premium paying capacity of the individual. The agent is paid a full commission based on this premium. Whatever money is left over after the commission is invested on your behalf.
After the investment is done, all other charges such as mortality rate (the cost of insurance or cost of risk cover), fund management cost, product administration charge are deducted out of the units that one receives.
In contrast, 'Intelligent Life' introduced by TIAA-CREF tries to address these issues. One of the key points in many insurance products in the developed market is the cost of insurance or the payment that covers each year's amount at risk. In many contracts in the developed markets today, the COI is assumed, in the policy illustration, to be an optimistically low price.
In subsequent years, at the life company's whim, the COI can be (and often is) raised - in extreme cases. The mortality rates are disclosed in the insured's annual report, but few advisors and fewer consumers know a great COI rate from a poor one.
The reality is that companies would load the cost of insurance very high in order to pay those costs associated with distribution.
In addition, Intelligent Life product allows policyholders to do something that was previously only possible with term contracts: lock in the same COI rate for 10 or 20 years. This is a very important point.
| TIAA-CREF Product |
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In ULIPs of today the cost of insurance goes on increasing every year with the age of the person whereas only in a term plan does this COI remain constant.
Intelligent Life has several choices of investment options. Unlike in India, where you have just four or five options available, Intelligent Life provides 47 options. These include several index funds and mutual funds that are managed by different asset management companies.
So where does the company make its money? Each policy has its own mortality and expense ratio, which ranges from 95 basis points a year on the first $100,000 of account value, down to 65 basis points on cash accumulation up to $500,000, and 35 basis points on amounts over that.
So what is TIAA-CREF? TIAA-CREF or Teachers Insurance and Annuity Association - College Retirement Equities Fund is a $380 billion financial services provider. It sells its products on the USP of low operating fee structure.
And it is able to do it as it does not pay its employees commission on sales. Its advisors receive no sales commissions as part of their total compensation. They are compensated through a salary plus incentive programme that rewards client service excellence rather than product promotion.
Since the Indian insurance industry is at a nascent stage (though rapidly growing), we are not sure whether such a product will be launched here anytime soon or whether we have what it takes to promote ethical advisory practices.
