It is an unnerving experience, getting admitted in the hospital. One is ofcourse, the fear of what tortures they will put you through… the other scare is entirely financial. When you get admitted in a hospital, you would not really be clear as to what all they will charge you for. You will not even know how much the bill will come to. In short, it is a huge amount of uncertainty & the consequent anxiety.
People investing in ULIPs are also finding themselves being subjected to anxieties, when they start getting to know the various charges. There are many charges in a ULIP, which an investor is supposed to know, before investing. But, many are not really aware. The most common charge that investors worry about is Premium Allocation Charge. But there are products which do not have any premium allocation charge, at all. It is not as if the milk of human kindness is being manifested through such a policy. There are other charges, which can compensate – like Policy Administration Charges. As the name suggests, it should be only to defray the expenses incurred to service a policy and should consequently not have anything to do with the amount of premium paid.
For instance, what will be the difference in servicing a policy where the annual premium is Rs.15,000/-, vis-à-vis another, where premium paid is Rs.30,000/-. Hence, as a rule, Policy admin charge is a fixed sum like Rs.40 Per month. What exactly they are doing on a monthly basis to warrant the charge, is ofcourse a mystery. But, the plot really thickens when the Policy Administration Charges are linked to the premium paid. Some policies link to the first annual premium, if the policy allows the premium to vary from year to year.
Now, there are two problems. Let us understand with an example. If the annual premium is Rs.15,000/- and if the Policy Administration Charge is 0.5% pm, the annual charges come to 6% pa. In this case, it will come to Rs.900/-pa. Now if the premium were Rs.30,000/-pa, then this charge would be Rs.1,800 pa. If the premium is much higher, like say Rs.3 Lakhs, the charges would be Rs.18,000/-pa. Now, you see the problem? Does the company really spend more for servicing a policy paying higher premium as opposed to another paying a much lower premium – enough to warrant Rs.900 pa charges in one policy and Rs.18,000 pa, in another? The problem is that most ULIP investors look only at the final figure that they may get after the tenure, as explained by the agent. The agent does tell in most cases that there are charges. The charges are spelt out in the brochures too. The client needs to ask the questions to understand what he would be paying in all, instead of being satisfied by “there are no Premium allocation charges” bit.
There is another problem with Policy Administration that is not apparent at first. This charge will continue even if you have stopped paying the premiums. In the example shared, if an investor has stopped paying the premium after three years, Policy Administration Charges would continue uninterrupted, maybe for the lifetime of the policy or for whatever time, the policy conditions envisage. This is particularly troubling… for this charge alone can become the hole in the vessel that holds their corpus.
Nor, are these the only charges. There can be a guarantee charge for highest NAV plans from 0.1% pa to 0.5% pa. Another charge is a Fund Management Charge. Depending on which fund one is putting the money into, there are charges. The charges would be about 1.3%pa today for Equity funds. In the past, it used to be upto 2.25%pa.
The other charge is the Mortality Charge. This is the risk premium that they are levying you to assume the risk. It is important to note what you are being charged here. Most ULIPs charge very competitive rates on this front. Though, you need to look into this too, as Mortality charges do not come under any overall cap. Creativity on the charges cannot be ruled out and it is a good idea to check the mortality rates and assure oneself that it is in line with their normal charges. Else, one would have a very costly insurance product, which may not even be a good investment product.
The other charge is the surrender charge. Surrender charge will be charged on the Fund value. The charges have come down dramatically from September 2010. It used to be extremely high in the first three to five years. In some cases, one could not even surrender in the first three years.
Insurance is a long-term product. Whether an ULIP or an Endowment product, it should be bought after careful thought. ULIPs are transparent and the charges revealed upfront, . Other products are opaque, which make them worse. Insurance should be bought for risk coverage. If ULIPs are looked at as investment vehicles, one should be willing to stay invested for 12-15 years or more. Only then it will make sense.
In summary, the following are what an investor needs to look at while going for a ULIP plan–
• What are all the charges that will be levied and for what period of time? Are these justified?
• What are other competitive products charging?
• On what will be the charges levied ( Surrender charge is on the fund value, Mortality charge is on Sum Assured and Premium Allocation Charge is on modal premium )?
• What is the tenure for which you would want to invest there?
• Performance of the funds under that company
• Would you be better served by some other option?
In the case of a hospital, you may go there based on references of the doctor or a friend. In case of ULIPs, your friends may not be able to guide you properly as they themselves may not be aware about the various charges. Do some homework yourself; or consult a proper advisor to assist you in this process. Else, it will be a costly decision, which you can repent at leisure!
Published in Business Standard on 19/12/2010
Showing posts with label ULIPs charges Ladder7. Show all posts
Showing posts with label ULIPs charges Ladder7. Show all posts
30 December, 2010
11 June, 2010
ULIPs and what you need to know...
There are regulatory changes galore. The latest is the lowering of the charge structure of ULIPs. They had come up with a formula restricting the difference between Gross and net returns ( after charges ) to 2.25 – 3%, at the end of the tenure. That looked like it will bring about a sea change in the way ULIPs are structured. It was felt that charges will be really down and will be good for the investor. Let’s find out.
Have the charges come down? Yes. But not as much as expected. The July 22nd 2009 circular from IRDA states… “ For insurance contracts which are of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.” A careful reading shows that this compliance is to be shown for the term and there are no caps, on a year by year basis. This is a trap door left open. This means that charges in the first few years can still be substantial. When we looked at a couple of products, this was borne out.
If we examine the changes that insurance companies have ushered in, taking a couple of products that have been launched now, it becomes evident that the charges are not that low. In ICICI Pru Maxima, premium allocation charges for year 1 is 7.5% & 3% for year 2 & 3 respectively. After that it becomes zero. These charges are indeed much lower than it used to be in the past. In case of another product – HDFC Endowment Supreme Suvidha, the first year premium allocation charges are 30%, 2 & 3rd year charges are 15% & 10%; After that, there are no premium allocation charges. However, there is another charge- policy administration charge, which can make all the difference. In case of ICICI Pru Maxima, policy administration charge ( as a % of Annual premium ) is 0.9% pm, charged for the first five years. In HDFC Endowment Supreme Suvidha, the policy administration charge ( as a % of Annual Premium ) is 0.4% pm for the entire term of the policy. In the earlier era, Policy Admin charges used to be a flat Rs.40- 70 pm, irrespective of the premium amount. Now, higher the premium paid, higher will be the policy administration charge. The work on the policy administration front is no different whether the premium paid is Rs.20,000/- or Rs.2 Lakhs, but in these products an investor will be paying higher charges for higher premiums, which is not justifiable. There are Surrender charges in both cases, till completion of five policy years. Fund Management charges are a flat 1.25%pa, chargeable on a daily basis in HDFC’s case and ranges between 0.75% to 1.35% in case of ICICI Pru Maxima.
On the plus side, ICICI Pru Maxima gives a 2% extra allocation from 6th year onwards and in HDFC’s Supreme Suvidha, they allocate 5% from 6th year onwards for every year of premium paid from 6th policy year onwards. Also in case of HDFC ‘s policy, they allocate a bumper addition of between 50- 100% of the annual premium ( something akin to the loyalty addition ) at the end of the tenure.
The charges are down compared to earlier times. There were products earlier charging upto 70% as Premium allocation charges in the first years. Now, that is not possible. But, there are still a whole lot of charges which are charged in the first few years. That brings me to the next point.
Front loaded charges creates a problem… By charging everything in the first three to five years and having surrender charges till five years, the insurance company is ensuring that all charges due to them come in and the policy holder cannot exit or can exit and get grievously hurt. Also, it presents an churning opportunity to the agents, some of whom will exploit to their benefit. The new regime does not address this pernicious problem, often reported against insurance advisors. A good idea would have been to impose caps on what they can get as commissions year-on-year, as also staggering the commissions, over a much longer tenure ( like 10 years ). An even better idea would have been to have a metric to ensure persistency of policies of the insurance advisor by having a differential remuneration – higher for those with high persistency and lower for those who show lower persistency. That way, there will be lesser incentive for misspelling & churning.
Rule applies only for policies held for the term - If an investor surrenders in between, the formula ( of difference between gross yield to net yield being a certain number ) does not apply to them. This means that investors should really treat ULIP investments as longterm investment vehicles. My experience on this is that people tend to exit after a few years ( with substantial inducement to move to another policy ).
Your yield can be different- The yields on the plans can be lower than the indicative yield. As per the same IRDA circular – “ Extra premium due to underwriting emanating from extraordinary health conditions, cost of all rider benefits, service tax on charges (as applicable) and any explicit cost of investment guarantee shall be excluded in the calculation of net yield”. This means there will be other charges like Service tax and cost of investment guarantee, which can be outside the purview of yield calculations. This obviously means that the net yield that an investor gets may be lower than what the plan illustration shows.
Is it all negative then. No really. The point is that the charges are down, but not substantially down. Also there are quite a few loopholes that can be cleverly exploited. The direction is good. But, there is scope for tightening, in the interest of investors. Insurance advisors still have traditional products, these rules don’t apply. It is hence a much more lenient treatment for insurance advisors especially as compared to their brethren in MF industry, where there are no entry loads and they have to charge a fee for services rendered. Probably, since there may be a reduction of the earnings compared to the period earlier, the agents may choose to sell traditional products more. Having such differentials in remuneration between MF & Insurance is not a good idea as many times the same person sells all these products. He could easily divert from MFs to Insurance products. Such imperfections in the financial services landscape is not good for the industry as a whole as it will ensure an unhealthy tilt towards Insurance products. It has been happening for sometime now. The investor needs to be aware of these and weigh the options before investing.
Published in Money Mantra in March 2010
Have the charges come down? Yes. But not as much as expected. The July 22nd 2009 circular from IRDA states… “ For insurance contracts which are of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.” A careful reading shows that this compliance is to be shown for the term and there are no caps, on a year by year basis. This is a trap door left open. This means that charges in the first few years can still be substantial. When we looked at a couple of products, this was borne out.
If we examine the changes that insurance companies have ushered in, taking a couple of products that have been launched now, it becomes evident that the charges are not that low. In ICICI Pru Maxima, premium allocation charges for year 1 is 7.5% & 3% for year 2 & 3 respectively. After that it becomes zero. These charges are indeed much lower than it used to be in the past. In case of another product – HDFC Endowment Supreme Suvidha, the first year premium allocation charges are 30%, 2 & 3rd year charges are 15% & 10%; After that, there are no premium allocation charges. However, there is another charge- policy administration charge, which can make all the difference. In case of ICICI Pru Maxima, policy administration charge ( as a % of Annual premium ) is 0.9% pm, charged for the first five years. In HDFC Endowment Supreme Suvidha, the policy administration charge ( as a % of Annual Premium ) is 0.4% pm for the entire term of the policy. In the earlier era, Policy Admin charges used to be a flat Rs.40- 70 pm, irrespective of the premium amount. Now, higher the premium paid, higher will be the policy administration charge. The work on the policy administration front is no different whether the premium paid is Rs.20,000/- or Rs.2 Lakhs, but in these products an investor will be paying higher charges for higher premiums, which is not justifiable. There are Surrender charges in both cases, till completion of five policy years. Fund Management charges are a flat 1.25%pa, chargeable on a daily basis in HDFC’s case and ranges between 0.75% to 1.35% in case of ICICI Pru Maxima.
On the plus side, ICICI Pru Maxima gives a 2% extra allocation from 6th year onwards and in HDFC’s Supreme Suvidha, they allocate 5% from 6th year onwards for every year of premium paid from 6th policy year onwards. Also in case of HDFC ‘s policy, they allocate a bumper addition of between 50- 100% of the annual premium ( something akin to the loyalty addition ) at the end of the tenure.
The charges are down compared to earlier times. There were products earlier charging upto 70% as Premium allocation charges in the first years. Now, that is not possible. But, there are still a whole lot of charges which are charged in the first few years. That brings me to the next point.
Front loaded charges creates a problem… By charging everything in the first three to five years and having surrender charges till five years, the insurance company is ensuring that all charges due to them come in and the policy holder cannot exit or can exit and get grievously hurt. Also, it presents an churning opportunity to the agents, some of whom will exploit to their benefit. The new regime does not address this pernicious problem, often reported against insurance advisors. A good idea would have been to impose caps on what they can get as commissions year-on-year, as also staggering the commissions, over a much longer tenure ( like 10 years ). An even better idea would have been to have a metric to ensure persistency of policies of the insurance advisor by having a differential remuneration – higher for those with high persistency and lower for those who show lower persistency. That way, there will be lesser incentive for misspelling & churning.
Rule applies only for policies held for the term - If an investor surrenders in between, the formula ( of difference between gross yield to net yield being a certain number ) does not apply to them. This means that investors should really treat ULIP investments as longterm investment vehicles. My experience on this is that people tend to exit after a few years ( with substantial inducement to move to another policy ).
Your yield can be different- The yields on the plans can be lower than the indicative yield. As per the same IRDA circular – “ Extra premium due to underwriting emanating from extraordinary health conditions, cost of all rider benefits, service tax on charges (as applicable) and any explicit cost of investment guarantee shall be excluded in the calculation of net yield”. This means there will be other charges like Service tax and cost of investment guarantee, which can be outside the purview of yield calculations. This obviously means that the net yield that an investor gets may be lower than what the plan illustration shows.
Is it all negative then. No really. The point is that the charges are down, but not substantially down. Also there are quite a few loopholes that can be cleverly exploited. The direction is good. But, there is scope for tightening, in the interest of investors. Insurance advisors still have traditional products, these rules don’t apply. It is hence a much more lenient treatment for insurance advisors especially as compared to their brethren in MF industry, where there are no entry loads and they have to charge a fee for services rendered. Probably, since there may be a reduction of the earnings compared to the period earlier, the agents may choose to sell traditional products more. Having such differentials in remuneration between MF & Insurance is not a good idea as many times the same person sells all these products. He could easily divert from MFs to Insurance products. Such imperfections in the financial services landscape is not good for the industry as a whole as it will ensure an unhealthy tilt towards Insurance products. It has been happening for sometime now. The investor needs to be aware of these and weigh the options before investing.
Published in Money Mantra in March 2010
ULIPs in the new dawn
“This product can give you fantastic returns, Sir. The earlier version of this plan had given a 32% return. It is a fantastic investment option, even though it is an insurance policy”, an insurance agent was telling Ravi when I came in. The agent was just leaving. He had left behind some colourful brochures.
Ravi turned to me and asked skeptically, ”Are such high returns possible from this ULIP?” . “Everything is possible in certain timeframes. What you need to have asked is, in which period it gave that return and what was the return of the benchmark in that period. That would have given you an indication of whether this fund has performed well or not.” I continued. ”You also need to look at the charges. The charges are supposed to have come down. But the charges in the first few years are still high. In one of the plans, the premium allocation charges for the first three years are respectively, 30%, 15% & 10%”.
Ravi was amazed. “But, I understand that the difference in gross & net yields should be no more than 3% for policies of term 10 years or less & 2.25% for policy term over 10 years. I thought it will be low due to this regulation”. I was able to understand the confusion. “ That will apply over the tenure of the policy, not year on year”, I said.
“There are other charges as well, if you want to know. Policy Administration Charges is another head, you would want to look at carefully. In the same policy, the Policy Administration Charges are 0.4%pm, for the entire tenure ie. 4.8% pa, throughout the policy term”, ventured I. “That high? “, gasped Ravi. Today was his day of surprises. “Yes. It is. And there are products where it is higher. Policy Administration Charges would be charged as a percentage of the premium, which penalizes those who pay higher premiums. ”, I said.
“So, what has come down then?”, Ravi wanted to know. I did not have a readymade answer to this. “ Fund Management Charges have come down a bit. Very high charge products ( Premium Allocation Charges in some were as high as 70%) have been weeded out. There are still charges which may not even come under the purview of the new regime. For instance, any cost associated with investment guarantee is excluded from the calculation of net yield. So, guaranteed NAV products have an element of cost that is open to creative use. Also, if you were to surrender after 5 years, most of the front loaded charges would have been paid and yet the regulation restricting the difference between Gross Yield & Net Yield, does not apply. Hence, it will be a big handicap for those who want to surrender early.”, I concluded. Ravi was absorbing all this intently. I now moved away to get my cup of tea.
published in Moneycontrol.com in May 2010
Ravi turned to me and asked skeptically, ”Are such high returns possible from this ULIP?” . “Everything is possible in certain timeframes. What you need to have asked is, in which period it gave that return and what was the return of the benchmark in that period. That would have given you an indication of whether this fund has performed well or not.” I continued. ”You also need to look at the charges. The charges are supposed to have come down. But the charges in the first few years are still high. In one of the plans, the premium allocation charges for the first three years are respectively, 30%, 15% & 10%”.
Ravi was amazed. “But, I understand that the difference in gross & net yields should be no more than 3% for policies of term 10 years or less & 2.25% for policy term over 10 years. I thought it will be low due to this regulation”. I was able to understand the confusion. “ That will apply over the tenure of the policy, not year on year”, I said.
“There are other charges as well, if you want to know. Policy Administration Charges is another head, you would want to look at carefully. In the same policy, the Policy Administration Charges are 0.4%pm, for the entire tenure ie. 4.8% pa, throughout the policy term”, ventured I. “That high? “, gasped Ravi. Today was his day of surprises. “Yes. It is. And there are products where it is higher. Policy Administration Charges would be charged as a percentage of the premium, which penalizes those who pay higher premiums. ”, I said.
“So, what has come down then?”, Ravi wanted to know. I did not have a readymade answer to this. “ Fund Management Charges have come down a bit. Very high charge products ( Premium Allocation Charges in some were as high as 70%) have been weeded out. There are still charges which may not even come under the purview of the new regime. For instance, any cost associated with investment guarantee is excluded from the calculation of net yield. So, guaranteed NAV products have an element of cost that is open to creative use. Also, if you were to surrender after 5 years, most of the front loaded charges would have been paid and yet the regulation restricting the difference between Gross Yield & Net Yield, does not apply. Hence, it will be a big handicap for those who want to surrender early.”, I concluded. Ravi was absorbing all this intently. I now moved away to get my cup of tea.
published in Moneycontrol.com in May 2010
Subscribe to:
Posts (Atom)