The Insurance Regulatory and Development Authority of India (IRDAI) has recently constituted working group to examine the need of Index Linked Insurance plans (ILIPs) especially with respect to availability of various indices and how it will better serve the needs and interests of customers relative to traditional savings product.
ILIPs, as the name suggest, are insurance products whose returns are linked to benchmark indices.
According to Vivek Jain, head-investments at Policybazaar, ILIPs can be linked to the 10-year government bonds or equity indices such as Sensex or Nifty. While those linked to government bonds are less risky, those linked to equity-based indices may have fluctuations in returns, based on stock market performance.
In view of this, let's understand the product in detail:
ILIPs were earlier available where policyholders got guaranteed value.
In its old avatar, this plan operated like a bank account, where each policyholder had a separate managed account. Even charges for surrender and withdrawal in this plan were implicit in natures throughout the term of the policy, according to Rakesh Goyal, director, Probus Insurance, Insurtech Broking Company.
How It Differs From ULIPs?
ILIPs differ from Unit Linked Insurance Plan (ULIP) -- which allows policyholders to direct part of their premiums into different types of funds such as equity, debt, money market, hybrid, etc.
"The returns in ULIPs are based on the type of fund chosen. However, ILIPs may generally give non-negative positive returns," explains Naval Goel, founder and chief executive officer, PolicyX.
How Will ILIPs Benefit?
In the past two-three years, the investment industry has seen that returns from many of the equity funds and ULIPs have been in the line with the benchmark returns.
"This was because markets had seen narrow rally in the last three years with only handful of 8-10 stocks driving the Nifty," says Goyal of Probus Insurance.
As Indian markets matures, he added, there will be need for passive products as more and more fund managers will find it difficult to beat the benchmark. ILIPs will serve the purpose
Additionally, given that globally passive funds are cheaper than active funds, experts are hoping the charges of ILIPs will be lower as compared to traditional plans.
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First Published: IST