ULIPS May Have To Give Details Of Spendings On St

HYDERABAD\MUMBAI: Investors in Unit-Linked Insurance Plans (ULIPS) will now get a break-up of charges and the exact amount available for investment during the premium payment period. This move will ensure greater transparency and better returns for investors in a booming stock market.

The Insurance Regulatory Development Authority of India (IRDA), which has reviewed the cost-structure in ULIPS, has a circulated a benefit illustration to life insurance companies. The new norms will come into force once the regulator gets a feedback from life insurers.

ULIPS are popular savings instruments as they offer protection in terms of life cover and flexibility in investments to the policyholder. A part of the premium is invested in equities or government bonds, depending on the choice made by the policyholder.

The investments are akin to a mutual fund. The returns are reflected in the increase in the value of the unit, mirrored in the net asset value declared by the company. Going by the benefit illustration, insurers have to give a break-up of the premium to be paid for each policy year along with a charges statement, said an official of a private insurance company.

Charges at the start of the year will include premium allocation charge, policy administration charges, rider charge, if any, mortality charge and any other charges. The difference between premium payable each year and total charges will be the amount available for investment.

Insurers will also have to list out charges at the end of each policy year, factoring in the interest rates approved by the insurance regulator in the file and use application. These charges will include fund management charge, surrender charge and any other charge. The policy holder and the marketing official selling the product will be signatories to the premium-cum-charges statement.

Any change in the charges while under-writing or finalising the deal will also have to be approved by the policy holder. The exercise is aimed at ensuring that the policy holder is fully aware of the cost structure and investment risks. Insurance regulator C S Rao has earlier told ET that IRDA had received several complaints on mis-selling of ULIPS during the course of inspection of life insurance companies.

Some insurers, however, fear that an extensive illustration will drown the policy holder in too much detail.Gaurang Shah, MD, Kotak Life Insurance said “I am strongly in favour of benefit illustrations as they help compare the yield between different investments”.

But he feels that the basic objective of the illustration should be to enable policy holders compare the yield. Another insurance official who did not wish to be named said that no product discloses distribution charges. He adds that publishing commission charges may increase the pressure to rebate.

The regulator decided to review the cost structure on Ulip’s after the ban on sale of actuarial-funded products. The products were withdrawn on the grounds that they were too complex for an ordinary investor to comprehend. The lack of transparency allowed agents to aggressively market the products without informing investors of the restrictive features.

According to reports, in many cases ULIPS have been sold as investment schemes such as those offered by mutual funds. What is not made clear to the policy holder is the fact that of every Rs 100 invested in the first year, a substantial portion goes towards commissions and other charges.

Hence, if a Ulip were to be sold to an individual with an investment horizon of only three years, most schemes are likely to result in generating returns lower than expected because of the front-ended charges.

Currently, there are around 70-75 ULIPS offered by life insurers. In most cases, the cost structure is front-loaded, with the agent’s bulk of the commission being paid in the first year. This results in lower returns in the initial phase.