Jagoinvestor

July 27, 2009

ULIP charges restricted to 3% by IRDA

Does God Exist? I don’t know, but IRDA surely does!!! And hence finally it has acted as GOD to the investors πŸ™‚ . On 22nd July, IRDA capped the ULIP charges at 3%.

Let us see in this article how this will affect Investors and the implications on Investments and Insurance Sector as a whole. The decision will be effective from Oct 1 2009.

ULIP

IRDA rules for ULIPS

Gross yield: This is the yield generated by the ULIP before all charges are deducted.
Net yield: This is the yield generated by the ULIP after all charges are deducted.

1. “ULIP charges” here would include allocation charge, administration charge, mortality charge and all such charges by any other name.

2. For Products whose Maturity is less than 10 years

  • “The difference between gross yield and net yield cannot exceed more than 300 basis points” (100 basis points = 1%)
  • “In this case, fund management charge cannot exceed 150 basis points”

3. For Products whose Maturity is more than 10 years

  • “The difference between gross yield and net yield cannot exceed more than 225 basis points” (100 basis points = 1%).
  • “In this case, fund management charge cannot exceed 125 basis points”

4. The IRDA has made PAN card mandatory for all policies where annual premium is more than Rs 1 lakh OR there is investment in Capital Markets. IRDA said this norm is to be implemented with immediate effect and all insurers are to comply not later than August 1.

What will be the Implications

  • ULIP products will surely see a decline in commission paid to agents. It’s very logical, IRDA is giving nightmares to Agents for some time. First it was abolistion on Entry load from mutual funds and now its capping the charges on ULIP. Agents are now going to get commissions which will be very very less compared to what they used to get earlier (like upto 35-40% in first year). It’s a bad month for Agents in India.
  • Now Agents would be really confused on whether to work hard on Selling Mutual Funds OR ULIPS as both are going to provide them almost the same kind of Commissions!
  • Miss-selling will be reduced in ULIPS as the primary motive of “High Commission” is crushed by IRDA.
  • Though ULIPs are still long term Products, I don’t recommend common man for short term investments in ULIP. Investors who think they are smarter than average investor can invest in ULIPs for short term, considering you know how to manage ULIPS well and reap the potential of switches (this mainly to churn the portfolio fast and save the short term capital gains tax). Read how to use losses to save your tax.
  • This Rule does not apply to traditional Policies, so its not a very good news for all considering Traditional Policies from LIC still dominate the Insurance Market :(.

What will happen to Existing Polices?

As per IRDA, all existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009. I can only imagine the state of Agents and Insurance companies which created ULIP mess all these years. IRDA really nailed them hard this time.

Many agents which were getting fat commissions from so many months will be sad on this.

How much will this help Investors in reaping benefits from ULIPS

This is a good move from IRDA and investors will be benefited. But how much?

Earlier most of the ULIPS charged heavily in First and Second year and then reduced the charges to NIL or very very less in later years. Because of which the charges were heavily skewed in Initial Years, but the long term average charges were still in range of 3-5%.

Now after this new Rule from IRDA, almost all the ULIPS will charge for every financial year (that what i think). Hence the long term charges will now be evenly distributed over long term, but still the average charge over long term wont come down drastically!!

Read a nice article from Deepak Shenoy on “Tactics used by ULIPS to hide the charges”

Can you Invest in ULIPS now?

ULIPS for me has changed its status from “Ugly” to “Average” product after this announcement. For long term Investors, ULIPs can now serve as a good product.

Charges wise its much better in long term now ( 2.25% max) and the best thing is if you need immediate money and want to close the policy you will not be hit hard like earlier. Take the policy after Oct 1.

Some Internal Information

Just before writing this Article, I was chatting with Pradeep (name changed), an internal source who is himself an ULIP agent. See what he has to say

Guest_7FF767C0: attened a sales talk by XXX for their new ulip … XXX which guarantees highest nav for the next 10 years !!!!
Guest_7FF767C0: all ptvt. life companies are worried about mandatory PAN for annual premiums of rs one lac. and above.today smart money(black) is routed through ulip cash payments on binami names.

Guest_7FF767C0: but sir! IRDA may kindly look at the very very high incentives to the sales team(policy expences).sebi from aug 1 st declared no entry load for mutual funds so no early commissions to agents which is only 2.25% where as 40% plus in life!

So according to him, Due to the mandatory PAN for more than 1 lac premium. Lots of black money is coming through Benami Accounts now.

See The Benami Transactions (Prohibition) Act, 1988 High Net worth Clients do not want to share there investments with Govt to save tax, but because of the “mandatory PAN” rule, the money is being diverted through “Benami Accounts”. This is totally unethical and unprofessional, but this happens at the top ladder, Looks like IRDA still has some more work on this plate.

Conclusion

This move will help investors and it will check the mis-selling going on for last many years. It will also help in making Insurance sector more mature in India. IRDA is coming up with solutions now and Jagoinvestor sees this move as a friendly move which will help in achieving the goals of “Making each Indian an Informed Investor” Thanks IRDA.

Readers, what are your views on this Rule by IRDA, How do you think investors will take this ? And Is it helping you in any way. Please leave your Comments on this .

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UdayaPoojary
UdayaPoojary
9 years ago

Hi Manish,

I read your article which is very useful.

However i was planning to buy SBI E wealth which is an ULIP plan and the executive said that the charges on ULIP plan is now reduced drastically and in SBI E wealth its even lesser than Mutual Fund charges.
However my Mutual fund agent (from a well professional MF agent copany) said that
“We would like to mention that expenses in ULIPs may range between 5-6% as against the maximum limit on expenses in mutual funds are 2.5%.Moreover mortality charges in Insurance products vary year on year whereas term plan premium is fixed.

Also we should not mix the features insurance and mutual funds.

We recommend a Term plan for protection purpose and other investments product (like PPF, FD, Mutual fund) for investment purposes as per your risk appetite for better risk – return generation.”

Can you please provide your fair opinion whether it is good go with SBI E wealth or not.

Regards,
Udaya Poojary

UdayaPoojary
UdayaPoojary
Reply to  Jagoinvestor
8 years ago

Thanks Manish for your fair and honest opinion.

Rajshekhar Ghosh
Rajshekhar Ghosh
11 years ago

Hi Manish,

I have a metlife policy smart plus, I bought this in 2007. The surrender charges for this policy is quiet high 50% of first year premium for 6th year 40% of first year premiun in 7th year and so forth. On reading your above article I realise you have said something about this.

What will happen to Existing Polices?

As per IRDA, all existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009. I can only imagine the state of Agents and Insurance companies which created ULIP mess all these years. IRDA really nailed them hard this time. Many agents which were getting fat commissions from so many months will be sad on this.

Does this mean they should reduce the surrender charges accordingly. If so can you help me with the relevant information that IRDA provides.

Regards
Rajshekhar Ghosh

sukhvinder
sukhvinder
11 years ago

hi
i have policy of aviva life super saver since jan 2008.. i have pain 5 premium of Rs 20000 each. presently its surrender value is Rs 79000. also no units were alloted against the first premium. i don’t no. why units were not alloted to me. policy term is 20 years. please suggest me is there any benifit i will get in future against no unit alloted to me. please suggest what i can do. contineoue the policy or surrender it.

Ashit
Ashit
13 years ago

pls give me detail of all the charges CAP. Like Highest slab of FMC, Pol Administratio, Premium allocation, Guaranteed part, and service tax and other tax in ULIP,,

Thanks and Regards
Ashit

Murali Krishna
Murali Krishna
13 years ago

Manish,
I am glad that this portal is helping investors to strategize their investment options.
I have the following question to you.
I had taken a ULIP from Birla SUN Life called Flexi Life Line 2006- To Age 100 Pay 15 with sum assured 6,00,000(25 years).I have paid premiums for the last 4 years and now i came about the new IRDA guidelines restricting the ULIP charges to a maximum of 3% over the entire insurance term.
After looking into my policy statement for the last 4 years, i see that i have been charged 60%, 8% and 5% for first 1, 2nd , 3rd year respectively.I also see that this 5% ULIP charges would continue for the entire term of 25 years.

I am now in a dilemma whether to continue the policy or close the policy or stop paying premium and use the outstanding fund value(around 73,000) to continue my insurance cover.

I even called up the agent who sold me this policy, he is asking me to continue this policy(coz it offers assured 4.5% per annum and no other policy in market offers that rate now.Also at the end of policy term, i would get 18-20 lakhs @ 10% market returns).

Do i need to believe this guy?

Do please advice me the best option i have?

Regards,
Murali

Murali Krishna
Murali Krishna
Reply to  Jagoinvestor
13 years ago

Dear Manish,
I see that policy says no surrender charges after 4 policy years.

Should i surrender and go for term insurance + Mutual funds

Do please advice me on this?
Regards,
Murali

Utpal
Utpal
13 years ago

Dear Manish,
I had invested in ICICI Pru Assure Wealth Plus plan in Feb’10, where I am required to pay 50k premium for minimum of 5 years. The Policy doc shows the Premium Allocation charges for first year at 100%. I am in need of funds now and want to discontinue the Policy. Do you think there is a way to get back part of the first premium of 50k now after deducting charges. Is there a IRDA rule to this effect.
Thanks.
Utpal.

Chakri
Chakri
Reply to  Jagoinvestor
13 years ago

Thanks a lot..your reviews and suggestions gave me a good learning.

I have been putting my money in SBI magnum tax gain and LIC profit plus since 2007 without reading any reviews. Although I thought these for a long term of 10 years, now i feel to close down these and go for traditional insurance plans.

I am 27 years old and thinking of taking a pension plan. My employer is already deducting some amount for pension from my Salary. Do you advice me of taking pension plan again?

trackback
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14 years ago

[…] Charges in initial years (not this will go away after new ULIP rules by IRDA) […]

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14 years ago

[…] answers asked to me on “Ask a question section” . These questions are on the topics on ULIPs , General Investing and Achieving Financial Goals . You can also look at other Questions and […]

Anupam
Anupam
14 years ago

Closing is not an option as the surrender charges will be way high ….. one option is to withdraw your money intermittently , if permitted, and move into paid-up plan. If I cancel and withdraw my policy now, i.e. after 3 years, I end up loosing close to 70% of my fund value. Right now I am assessing that what is the best course of action.

Transferring to a new policy , that is an option that never struck me. May be even I can explore it.

Anupam

PS: had one more update and realized one more way ULIP Companies are cheating investors. Each ULIP Product is associated with several funds which you can choose, now what companies do is that they launch new funds and aggressively manage them, and lure new customers into the web. Once sufficient customers have been netted, new funds are started and old funds are allowed to wither away, thus eroding customer wealth. And the old customers do not have the option to move to new funds at their will.

SJ
SJ
14 years ago

Hi Anupam,

Thanks for taking initiative and sharing the information.

I’ve also have one five year old AVIVA’s ULIP with similar formula for surrender charges, I guess such products are called Acturial products which dig a hole in our pockets if we dare to surrender before maturity.
I was also thinking of contacting IRDA about their recent guidelines and their applicability on existing policies.

Now based on their reply I’ll also have to think whether to continue with it (till maturity) OR convert it into paid-up OR ask CC about any possibility of transferring these funds to new policy OR surrender it. I’ll consult with few before taking any action and would post their thoughts/suggestions.

-SJ

Anupam
Anupam
14 years ago

Guys,

My faith in IRDA has been boosted as today I got a reply form them regarding the Cap on Charges and 5 year rule on surrender charges. The news is not good (as expected), as they have informed that since the contract was purchased prior to the notification, the notifications are not applicable to old existing polices.

Only if the ULIP provider includes a new fund with fewer charges and you shift to it, then you get a little bit of benefit.

Still a clarification is a clarification.

Next Steps: understand the Paid up part of my policy. What are the pros and cons. What will eb my sureender value etc. If I understand correctly, on making my policy paid-up, I don’t have to pay my premium and my life insurance cover continues by way of deduction of charges from my fund. Since my policy is over 3 years old, this is an option. If anyone has exercised this option, please post your experience here. I will keep on updating the group on my experience

Anupam

vivek
vivek
14 years ago

hi manish
There are new ULIP policies in the market, which they claim is the lowest cost ULIP, these are ICICI Pru ACE. It has no premium allocation chargesduring the entire term of the plan. but there are three charges altogether in this policy.
1) policy administration charges-Rs. 60/-per month through out the term of the plan.
2) fund management charges of 1.35% in all equity oriented funds.
3) mortality charges.
Another poluicy is from LIC that is wealth plus.
can you review these policies.
i think icici ACE is worth taking it. wat do u think?

vivek khadse
vivek khadse
14 years ago

can anyone tell me what will happen if old policies are not modified or closed.??

Srinivas
Srinivas
Reply to  Jagoinvestor
14 years ago

Hi Maneesh,

I have a ULIP, max newyork life. And I still see the same administrative charges levied as before. It is not clear from IRDA circular, about Cap on charges, if existing policy holders will get the benefit atleast from Jan 1,2010. Can you please elaborate on this.

Srinivas

Srinivas
Srinivas
Reply to  Jagoinvestor
14 years ago

Yes Manish, i am talking about 2.25% charges. As of now, for my policy, i see (0.42% sum assured)+(mortality charges) are deducted every month. I paid rs. 50000.00 as 1st year premium last year, sum assured being 5 Lacs(20 yrs term). Fund value was 38970.00 very first month (Feb 2009). After that they are deducting Rs 2464.00 as Administrative charges. Thats almost rs. 29568.00 for one year as charges. Present fund value is just 26775.00. I dont know how to calculate that 2.25% but I am sure I am paying huge amount as charges and the difference is quiet higher than 2.25%. I am planning to stop paying any more premiums. what do u suggest after seeing these figures?

Subham
Subham
14 years ago

Can I surrender the ULIP policy with in 1year.Is there any new rule from IRDA that before the locking period policy can be serrendered??
Please help me on this…

Anupam
Anupam
14 years ago

He He .. I did not CC him, I complained to him and CCed Insurance companys CC email and their CEO’s ID too …. πŸ™‚

My ULIP is Aviva ….

Anupam

Anupam
Anupam
14 years ago

My emails to the IRDA contact email id bounced repeatedly, so today I called up IRDA office and was suggested that I drop an email to the chairman sir. I have done that.

Regarding getting a response form IRDA , I am very hopeful as my experience with them is that they are very responsive. I had an issue with my Car Insurance company and when they did not respond despite repeated follow-ups, I dropped an email to IRDA CCing the customer care of the company. And I got a reply email from IRDA in 2 days, and a follow-up letter from IRDA arrived yesterday πŸ™‚

PS: my ULIPs lockin period is 10 years. I was ok with it initially as I believe that that ULIPS are long term investments, but with the pathetic performance of my ULIP, I am inclined to close the ULIP ASAP.

Will keep the group posted on the updates.
Anupam

Tanuj
Tanuj
14 years ago

Hi Anupam,

Appreciate your understanding & interprations skills. As rightly pointed out by you, even i interpret the new regulations as applicable to new policies and existing policies for any new sale. Existing policy holders have signed a contract (the policy) and IRDA is not insisting on amending the SIGNED policies. Only draft of new policies under same scheme will change.
Since i have already invested 2.4lacs in Aviva ULIP, I still am hoping to be wrong in my interpretations. Still waiting for IRDA’s response to your mail which might just say that cost apart, surrender charge regulation will apply to all policies (existing and new) under any ULIP scheme. Hence, when i will complete 5 years of policy term next January (2011), i will be able to withdraw atleast my principal amount. (we can forget about the returns part- as on date, my 2.4 lacs have earned 5K in 4 years). I really needed this money now to finance my first home πŸ™‚
How come IRDA is not doing anything about investors who are already caught in this KNOWN trap. If it cant help us get us a fair deal, atleast it can enforce an optional exit wherein we get our principal back with 3% interest (which they can again deduct in name of whatever charges)

Would appreciate if you can keep us posted about IRDA’s response (i wonder if this body will respond). But i do appreciate your logical approach and patience- really πŸ™‚

Regards,
Tanuj

Anupam
Anupam
14 years ago

I have quoted exact circulars & paragraphs to them, and their response is: IRDA circular has target date of 1 Jan 2010 and is applicable to polices sold after that date only, so my policy has no changes in T&C.

Again, even I am confused: I quote “The new regulation will be effected from October 1, for all products approved by the regulator after this date and all the existing products that do not meet the requirements should be withdrawn or modified by December 31.” This can mean that all products that are not compliant cannot be sold any further without any modifications to make them compliant, but nothing is mentioned anywhere about current policy holders.
An analogy can be, on implementation of bharat stage 4 pollution norms, car companies can either make their models compatible or stop selling them, they are in no way obliged to make older models complaint to the new norms. Right.

Now the IRDA circulars are not clear on this aspect and on the changes to be made for existing customers who are paying heavy charges.

I have dropped an email to IRDA, regarding this and will keep everyone posted.

Once again, I am requesting all the readers to check with tier insurance companies on the two circulars and update the group.

Regards
Anupam

PS: in the newspaper article Aviva’s CEO is quoted …

Anupam
Anupam
14 years ago

Aviva CC says , new rules applicable only for new polices / products approved/sold after Jan 1, 2010 only and no changes to my ULIP policy.

Regards
Anupam Kansal