Will regular-policy tortoise outrun the single-payment Ulip hare?

If you get to choose between paying insurance premiums periodically (that is, every month, quarter, half-yearly or annually) and paying just once (at the time of buying an insurance policy, and be done with it), which option would you choose? Chances are, you, like countless others, might just plump for the latter, given the perceived convenience.

Data indicate that more and more insurance consumers appear averse to the long, pesky process of remembering the last date for payment month after month, and then making the payment in time, for fear of late payment fines.

“There is a major shift in the insurance buyer’s behaviour. Most of them are not willing to commit to long-term premium payments,” says P Nandagopal, managing director and chief executive, IndiaFirst Life Insurance.

But experts in unit-linked plans (Ulips) say that although one-time premiums appear irresistible, it is the regular periodic premiums that will likely win in the long run. How? Through a better strike rate, that’s how.

Here’s the reality check.  Of late, life insurers have been furiously tapping into the single premium space. So furiously, in fact, that as of November 2011, as much as Rs29,980 crore or 52% of industry-wide premiums came from single-premium Ulip policies!

Private sector insurers lead the list, having collected no less than Rs5,247.11 crore (or around 32% of their total premiums) through single-payment premiums. State-run Life Insurance Corporation, India’s largest insurer, is not lagging either, having netted Rs1,059.63 crore or 47% of its total premiums from single-payment premiums.

This is a tectonic shift in the insurance policy landscape alright. But the investment tools that come with single-premium policies offer a limited life cover (or sum assured), depending on the chosen amount of premium. “The positioning of single-premium products is wrong, considering the lower cover provided. Customers will end up paying unnecessary charges like mortality for which they won’t be getting expected benefits,” says Suresh Sadagopan of  Ladder7 Financial Advisories.

While popular discourse cites convenience as the main reason for the popularity of single-premium Ulips, industry observers say they know better. It’s the lack of discipline in insurance buyers, they aver. Poor saving habits and unimaginative investment planning explain the fascination for one-time, zero-renewal premium Ulips, they argue.

Well, consumers alone are not to blame. Insurance agents, industry experts say, seem to prefer single-premium customers as clerical work and handling costs are less than that of periodic plans. And this in spite of the Insurance Act 1938 which pegs distribution commissions for single-premium Ulips lower at 2%, compared to 10% on regular premiums.

In contrast to single-premium Ulips, periodic-payment policies inculcate the habit of disciplined saving among investors. Besides, the total amount of premiums at the end of the policy tenure is lower. What’s more, there is no upper limit on the sum assured, depending on the amount of premium chosen.

Also, insurers can invest proceeds from regular policies in capital markets opportunistically, as per changing conditions, thus offering the prospect of healthy returns to investors. Single-payment plans don’t offer this flexibility to insurers’ investment funds.

“Single premium plans hardly hold any chance of averaging, unlike the regular premium plans which are more beneficial, in terms of cost and tax benefits. Besides, if you have a poor performing fund, it will be difficult for a single-premium customer to exit because he will have already paid the entire premium in advance,” says Jayant R Pai, vice-president, Parag Parikh Financial Advisory Services.