Why ULIP’s are not good choice?
ULIP is one of the most controversy product in the financial world. It is because of its high management charges and commission to the agents. The situation has changed after the chain of events like controversy on agents commission and SEBI’s ban on ULIP policies. The cap for charges on ULIP policies have been reduced by IRDA. It becomes the more competitive to mutual funds.
What was the charges on ULIP policy?
ULIP policies got the very bad name among the investors because of its high charges levied for the first three years. This section explores the different expenses charged on the ULIP policies.
Most of the ULIP policies charges more fees for the first three years. Basically insurance companies would charges the following fees on the ULIP:
* Initial administration charge
o Most of this charges are goes to the agents who is selling the policy to you. Agents are getting up to 40% commission from the ULIP policies. Worst fact is that this commission is paid from your premium amount. As we know that ULIP premiums are invested in the market, the final amount invested is reduced because of the charges.
* Regular administration charge
o This is as like the Initial administration charge, goes to paying the agents commission.
* Policy administration fee
o This fees levied for sending you the periodic updated on the policy status. It occurs every month.
* Investment management charge
o This fees levies for managing your fund. Normally this type of charges are levied some percentage on the total fund value.
* The charges are different from each insurance company. Few companies charge the whole amount in the first three years, but some of the companies to charge little on entire tenure of the policy.
* Agents mis-sell ULIPs by saying that you have to pay only for the first three years, after that you need not pay anything. It is because they get the high commission on first three years.
ULIP Reforms
There are number of changes done on nature of the ULIP since October 2009. It makes ULIP more attractive to the investors compare to the previous one with high cost deductions.
* ULIP with less than 10 Years
o There is 3% cap on charges levied by the insurance companies on ULIP. It means, the total fees collected on ULIP premiums can not exceed 3%. It is defined as difference between net yield and gross yield should not exceed 3%.
o In the above 3%, the management fee can not be more than 1.5%.
o Gross yield is the yield generated by the ULIP before all charges are deducted.
o Net yield is the yield generated by the ULIP after all charges are deducted.
* ULIP with greater than 10 years
o Over all fees can not be more than 2.25%.
o Management fees can not be more than 1.25%.
* Remember that charges here would include allocation charge, administration charge, mortality charge and all such charges by any other name. The total fees would reduce when you opt for the long term investment.
* Unit-linked insurance products (ULIPs) filed after September 30, 2009 will have a lock-in of five years.
* According to the IRDA, there will be new norms on tightening the commission and fees on ULIP products. It is trying hard to make the investment more attractive for the investors.
* The new norms will have the high life cover, in the existing policies have the high focus on the investment rather than the protection on life. IRDA want to bring more clarity on the life cover and investment portion on the same product. This make investors to clearly understand how much is invested and how much is insured.
* In order to put more money in the hands of investors, IRDA recently said that insurers cannot charge a fee for surrendering a unit-linked insurance policy after five years.
* At present, insures charge more fees on surrendering the policy even after the completion of the lock-in period.
What you should look at ULIP
When you are planning to buy the ULIP policy, it is necessary to look into the following facts to make the right decision. The problem in choosing the right policy among hundreds of existing policies is taunting task for the investors. The following are the few factors you have to look at while selecting the ULIP:
* You must know what is the purpose of buying the ULIP policy. If your goal is to buy a life insurance, then ULIP is not the right choice. This is the place where many investors mis-understand the difference between insurance and investment. ULIP is combination of life cover with investment product.
* If you are looking for the investment with low risk, then ULIP will not be suitable for you. As I have explained earlier, your premiums are directly invested in the market. The returns are based on market conditions.
* Don’t go the way of agents guidance. You will regret for that in future. You must be careful on protecting your own money. Don’t blame others for your mistake. Do the proper analysis on available ULIP policies and make the right decision.
* ULIP is not for the short term investment. If you are looking for the investment product for less than five years, mutual funds can be good choice. If you are looking for the investment of minimum 10 years, ULIP will be better option.
* One of the important factor, know the charges deducted on your premiums. Ask your agents clearly that how much will be invested after deducting all the charges. Also ask him the commission earned on selling the policy to you. He must disclose the commission details to you.
* Ask too many questions to agent for better understanding of the policy.
Say Thanks to SEBI!!!
I would see these reforms and changes on the ULIP policies because of the increasing competition from the SEBI over IRDA. ULIP investors must say thanks to SEBI for putting pressure on IRDA to introduce new norms on ULIP policies. However IRDA wins over SEBI in the battle. I feel customer finally won the battle. The reason why IRDA has reduced the fees on ULIP, because SEBI has removed the 1% entry fees on mutual funds.
For furthur queries contact us
Happy Investing
Regards
Team
Theequitymarkets
