Thanks to the Insurance Regulatory and Development Authority (Irda), customers now know the various charges insurers levy on unit-linked insurance products (Ulips). Irda had tightened Ulip norms in September this year. Yet, most people investing in are unaware how the total charges add up.
Premium Allocation Charge (PAC) is a common charge that buyers look out for. They would easily fall for products which do not have any premium allocation charge. Yet, an insurance company will compensate its absence by levying a Policy Administration Charge. As a rule, policy administrative fee is a fixed sum like Rs 40 per month. As the name suggests, it should be charged on the expenses incurred to service a policy and should, consequently, not have anything to do with the amount of premium paid.
Yet, some insurers link it to the premium paid. Some link it to the first annual premium, if the premium varies each year.
Now, there are two problems. Take this example. If the annual premium is `15,000 and if the policy administrative fee is 0.5 per cent a month, the annual charges come to six per cent yearly. In this case, it will come to 900 per annum. Now, if the premium were `30,000 per annum, this charge would be `1,800 per annum. If the premium is much higher, like `3 lakh, the charge would be `18,000 per annum. Does the company really spend more on servicing higher premium paying polices as opposed to those with lower premiums? The problem is that most Ulip investors look only at the returns they get. Charges are spelt out in the brochures which the client needs to understand.
FURTHER JOLTS
Another problem with policy administration is the charge continues even if you have stopped paying the premiums. In the earlier example, if an investor has stopped paying the premium after three years, policy administrative fee would continue until maturity or the period mentioned in the policy conditions.
There are other charges, too. A guarantee charge for the highest Net Asset Value plans could be 0.1 to 0.5 per cent per annum. A fund management charge depends on the fund your money is being invested into. These would be about 1.3 per cent yearly for equity funds today, lower from the 2.25 per cent, in the past.
Then, there is the mortality charge. This is a charge levied to cover the expected cost of benefit payment due to death. Most Ulips charge very competitive rates on this front.
You need, though, to look into this, too, as mortality charges do not come under any overall cap. Creativity on the charges cannot be ruled out and it is a good idea to check the mortality rates and assure oneself that it is in-line with their normal charges. Else, one would have a very costly insurance product, which may not even be a good investment product.
The other charge is surrender charge. These have come down dramatically since September this year. It used to be extremely high in the first three to five years, earlier. In some cases, one could not even surrender in the first three years.
HOMEWORK
Insurance is a long-term product. Whether a Ulip or an endowment product, it should be bought after careful thought. Ulips are transparent as compared to other products. Insurance should be bought for risk coverage. If Ulips are looked at as investment vehicles, one should be willing to stay invested for 12-15 years or more. Only then will it make sense.
In summary, these are what an investor needs to look at while going for a Ulip plan:
What are all the charges that will be levied and for what period of time? Are these justified?
What are other competitive products charging?
What are the charges levied on (surrender charge is on the fund value, mortality charge is on sum assured and PAC is on modal premium)?
What is the tenure for which you would want to invest there?
Performance of the funds under that Ulip plan
Would you be better served by some other option? Do some homework or consult a proper advisor to assist you in this process. Else, it will be a costly decision.