IRDA questions need for highest NAV guarantee products

Highest NAV guaranteed products were the flavour of the season in the last couple of months – and it continues to be so. These products are Unit Linked Insurance Plans or ULIPs in which the insurance company guarantees the customer the highest NAV which the policy has achieved in the entire term of the plan.

On paper these schemes sound very attractive as customer as the customer is enticed by the highest NAV clause. In reality, the life insurance companies would ensure that the NAVs do not rise dramatically because they would then need to pay the customer basis that high NAV when the policy matures. So they would invest substantial amounts into debt instruments which give low but fixed returns. So these products should not be expected to do as well as equity oriented schemes. But these facts are not really part of the documentation.

There are some positives to these plans also. To get the highest NAV, the customer would need to remain invested till the maturity time of the product. So it forces the customer to a long term product, which as an insurance plan is a good thing.

IRDA has asked 2 life insurance companies on the need for such products. This came up as the 2 life insurance companies had sent their highest NAV products for approval to IRDA. Some of the old highest NAV schemes have been very successful as was the case of LIC’s wealth plus scheme.

It remains to be seen, if IRDA approves the plans from these new insurers.