Promise of big leap in Ulip returns

Come October, unit-linked insurance plans (Ulips) will give more returns to policyholders. The Insurance Regulatory and Development Authority (IRDA) today issued a circular capping overall charges that life insurers can levy on Ulip subscribers. The cap will come into effect on October 1. The insurance regulator has also decided to approve only those new Ulip filings that conform to the provisions of the circular. “All existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009,” the regulator said. “Insurance companies have a number of Ulips and under each product there are various charges which are recovered from the contribution or from the fund value. It is decided that the IRDA will prescribe one cap on all charges put together,” the regulator said. The charges include a mortality levy, fund management fees, policy or administration fees and a surrender charge. The regulator has said the cap on charges will be based on the difference between the gross return showed in benefit illustrations and the actual return that policyholders get after adjusting for all charges. Benefit illustrations give policyholders an idea about how much they will get taking into account all charges. For unit-linked plans having a policy term of less than or equal to 10 years, the differences between gross and net returns shall not exceed 300 basis points (100 basis points is equal to one percentage point) and of this, fund management charges shall not exceed 150 basis points. For policies above 10 years, the differences between gross and net returns shall not exceed 225 basis points, of which fund management charges shall not exceed 125 basis points. At present, while selling Ulips, life insurers are required to show prospective policy-holders benefit illustrations assuming two gross returns — one at 6 per cent and the other at 10 per cent. Let us understand this with the aid of a benefit illustration of a unit-linked plan of a leading private insurer. A 40-year-old male paying an annual premium of Rs 1 lakh, with a sum assured of Rs 5 lakh for 15 years, will get Rs 26,88,132 at the end of the 15th year provided his investment grows at a gross rate of 10 per cent. Under the new rule, he should get at least Rs 28,69,336 on maturity, which is a gain of Rs 1,81,204. Post-October, insurers will also have to give on maturity a certificate to policyholders showing year-wise premiums, charges deducted, fund values, partial withdrawals by policyholders and the final payment. The new rule will certainly put private insurers on the back foot because over 90 per cent of their total business come from Ulip sales. The initial expenses on Ulips are very high, varying between 20 per cent and 60 per cent of the premium. A large part of this initial charge is spent by insurers on agency commissions. The new directive of the IRDA is expected to result in reduced commissions for insurance agents. Justifying lower caps on charges for longer term Ulips, the IRDA said, “Insurance products are long-term saving vehicles and the policy prescriptions should help the customers to move towards long-term-savings-cum-protection rather than short-term one.”