IRDA to review ULIP cost structure

Insurance regulator IRDA has decided to undertake a fresh review of the cost structure of Unit Linked Insurance Plans (ULIPs) to make the product affordable and attractive for retail investors in a choppy market.

In a news item in the Economic Times News paper, it mentioned that one option is to pare the commission charges to make ULIPs attractive for investors. Currently, insurance firms are allowed to pay a maximum commission of 40% of the first year premium, 7.5% in the second and third year and 5% thereafter. The commission structure is hence front-loaded as a bulk of the agents’ commission is paid in the first year.

The regulator has already given an indication to the Life Insurance Council — an association of life insurance companies — that the commissions are too high and opaque.

A few firms have responded by pruning their commissions. Bajaj Allianz, whose commissions were close to the upper limit, has halved commissions and expects average payout to agents to be around 17.5%.

Investors pay a host of charges to the insurer in the beginning of the year including premium allocation charge, policy administration charge, mortality charge and rider charge. The difference between the premium payable each year and total charges is the money that is available for investment. Charges are paid at the end of each policy year. These include fund management and surrender charges.

IRDA is reviewing the entire cost structure now. The move needs to be viewed against the backdrop of a spate of complaints from the mutual fund industry on the hefty commissions being paid to insurance agents selling ULIPs and other traditional products. Sebi, on the other hand, has capped the expenses of the mutual fund industry. Until now, high returns from stock markets made it possible for insurers to generate great returns despite hefty commissions. Recently, the IRDA has indicated that the charge structure in ULIPs should be more transparent by adopting a uniform nomenclature for all charges and the same structure should be followed by all the insurance companies so that there is a level playing field for investors when they compare ULIPs.

EPF rate to stay at 8.5% - Part 2

This article is an continuation EPF rate to stay at 8.5% - Part 1 which is a two part series.

Given the long term nature of the money that one is planning to put into the EPF, it is very important that the returns of the money invested in other options is reasonable, competitive and at the same time small differences in the returns over long periods of time make a significant difference over a period of 25-30 years.

Here is one option instead of contributing to EPF over and above the mandatory contribution.

Unit Linked Unit Plan (ULIP) - Unit linked plans are those that not only give you insurance cover but over long periods of time have given good returns even in the most conservative of the plans where all the money is invested in debt related instruments. Here are a few distinct advantages of ULIP over the EPF.

a. Tax treatment - Given that one is entering into a contract with the insurance companies today, the treatment of the income from ULIP after the maturity of the policy is tax free. However, in the case of EPF, while withdrawals are tax free today,it is quite possible that the withdrawals will become taxable if one goes by the recent news paper reports about taxing the withdrawals.

b. Alteration of risk profile - One has the ability to alter the profile of the investment over the life of the covered period by moving between equity and debt. However, in EPF no such facility exists.

c. Discipline in investment - Given that one gets into the contract with the insurance company for a committed investment during the tenure of the policy, it instills a sense of discipline where one is forced to continue the investment which if one does sustain, loses significant benefits of the previously made investment. While, a similar facility exists in contributing to EPF also, such commitment is not a must and no penalties are levied for lack of contribution.