CONTENT COURTESY : THE ECONOMIC TIMES 26 MAR 2013
Insurance sales people are trying to push unit linked insurance plans (Ulips) to unsuspecting individuals who are in a rush to invest in tax-savings instruments as another financial year nears the end.
According to investment experts, even financially savvy individuals, in a hurry to meet the March 31 deadline, don’t make an effort to understand all the charges that apply to this new breed of Ulips.
“Though commissions have dropped from over 20-30% before September 2010 to 8-10% now, Ulips are still an expensive affair. Many insuranceseekers do not realise this,” says Pankaj Mathpal, CEO of Optima Money Managers.
Insurance Regulatory and Development Authority (IRDA) had capped charges on Ulips in September 2010 following widespread criticism about mis-selling of these products.
“Also, most people tend to focus on premium allocation alone. But, there are several other charges, like policy administration and mortality charges, which affect your total corpus,” says Mathpal. For instance, policy administration charges in some Ulips increase every year after the fifth year.
If you have decided to buy Ulips — which experts don’t think is the ideal way to save tax or buy insurance cover — try to identify the least expensive one, say investment experts. Simply jot down the premium and charges you would pay in, say, 10 years.
Consider buying a Ulip which allocated the maximum portion of your premium towards investment. Another point to note is that you shouldn’t get swayed by assurances or claims by your financial advisor about returns, as these products are market-linked.
Premium allocation charge
Independent financial planners used to frown upon Ulips because of their higher premium allocation charges. Before Irda clamped down on charges more than two years ago, insurance companies used to deduct over 20% of the first year’s premium as allocation charges.
Following Irda’s new regulations, the figure has come down to 7.5% in most Ulips. Commissions, too, have come down to 8-10%. However, financial planners continue to consider Ulips as relatively expensive products. So, study the product brochure and benefit illustration closely to understand the charge structure.
Policy administration charge
When you analyse the benefit illustration, you will realise that in addition to premium allocation charges, a seemingly small, ad-hoc sum is deducted from your premiums every month. Known as policy administration charge, it used to form a minor component of the Ulip charge structure before the new guidelines came into effect.
Typically, the charges are in the region of Rs 70-100 per month during the initial three to five years. In case of many Ulips, the policy administration charge goes up by, say, 3-6% every year after the initial period.