New Year. From December 31, existing Ulips will get phased out following new regulations on charges from the Insurance Regulatory and Development Authority(Irda).
The new plans will conform to the cap of 3 per cent on charges. The new Ulips will help policyholders earn returns better than the present crop of Ulips. This would be possible because the amount invested from the first premium paid will be much higher than it is now. The upfront deduction of charges would stop and would be spread over a longer period, thus increasing the returns for policyholders.
All the products will be revised and will conform to the new rule from January 1 next year.Irda announced the new regime of Ulip charges in June 2009. Accordingly, the charges will be capped at 3 per cent (300 basis points) for a policy with tenure of up to 10 years, of which fund management charges cannot be more than 1.5 per cent (150 basis points).
For policy tenures above 10 years, the charges cannot exceed 2.25 per cent, of which the fund management charges cannot exceed 1.25 per cent (125 basis points).Insurance companies will have to provide customers charts on the gross yields and the net yields (after deducting all charges). The difference between gross and net yields cannot exceed 2.25 per cent (225 basis points) for product with tenures of more than 10 years and 3 per cent for products with tenures of up to 10 years. going forward, policies with borderline terms of 10, 11, 12 years will not be pushed by companies. According to Mathur, products with five-seven-year terms will slowly be phased out because companies won’t find value in selling such products.
Until now, all insurance companies were deducting fund management charges, mortality charges and charges on yields upfront, that is from the first premium paid. In many cases, around 80-100 per cent of the first premium was usurped by the private companies by way of various charges and allocations to funds were made only from the second premium.
With a cap on overall charges, the customers stand to benefit in the form of higher returns on their investment. Moreover, life insurance companies will now be encouraged to sell long-term products because there are lower charges on products with a term greater than 10 years.
The move by Irda follows what mutual funds (MFs) are allowed to charge. MFs can charge up to 2.5 per cent of assets under management (AUMs) under various heads as fees.
I give credits to Sneha Shah & Rajendra M Palande of financial chronicle for this write up.