Retail investors to benefit as returns will increase; move effective from October 1
Unit-linked insurance plans (Ulips) are set to become more attractive for retail investors as the regulator today capped the charges levied by insurance companies on such investments. The cap, which comes into effect from October 1, will increase returns from Ulip investments.
The Insurance Regulatory and Development Authority (Irda) has capped the difference between gross and net yield to customers at 3 per cent for 10-year policies and at 2.25 per cent for policies of more than 10 years. At present, the charges vary between 1.8 per cent and 4 per cent depending on the tenure of the investment.
Irda has capped fund management charges at 150 basis points for policies with a period of less than 10 years and 125 basis points for above 10 years.
According to the circular, at the time of sale, the insurer may assume a growth rate of 10 per cent per annum of the investment as a model. This would help customers understand products and charges easily.
“In order to enable customers to have a clear understanding of the product, it is decided that Irda will prescribe one cap on all charges put together. This will ensure flexibility for insurers and encourage product innovation,” Irda said.
Irda said the extra premium from underwriting extraordinary health conditions, cost of all rider benefits, service tax on charges (as applicable) and any explicit cost of investment guarantee would be excluded in the calculation of the net yield.
The regulator said insurers could withdraw all existing policies that did not meet the requirement by December 31, 2009, while all policies filed after October 1, 2009, would be governed by this circular.
Bharti Axa Life Insurance CEO Nitin Chopra said the cap on Ulip charges at 2.25 per cent for a gross yield of 10 per cent over the long term would make Ulips more competitive and customer-friendly. Chopra, however, said it would help if mortality charges were removed from the overall ambit of charges as these charges were dependent on individual customer profiles and the amount of cover required.
At the time of maturity, the regulatory authority said, the insurer must issue the policyholder a certificate showing year-wise contributions, charges deducted, fund value and final payment made to the policyholder taking into account partial withdrawals, if any. This certificate must also show the actual gross yield and net yield taking into account the actual charges deducted.
Insurers are skeptical about including mortality charges under the overall charges saying it may adversely impact sales, especially to aged customers.
Over 90 per cent policies private insurers sell are Ulips while state-owned Life Insurance Corporation of India (LIC) has collected 85 per cent of the premium from equity linked investment products.
“This will make ULIPs even more transparent and favourable for customers. With a cap on overall charges, customers stand to benefit in the form of higher returns. Moreover, lower charges on products with terms greater than 10 years will provide impetus to long-term policies.” said Aviva India CEO and MD T R Ramachandran.
