Making insurers explain costs

The Insurance Regulatory Development Authority (Irda) issued a circular to the life insurance industry on July 22, capping overall charges in Unit Linked Insurance Plans (popularly known as Ulips). Most insurance companies today have several Ulips, each one having a different cost structure and various types of charges, such as Premium Allocation Charge (PAC), Product Administration Charge, Mortality Rate and Fund Management Charge. These are recovered from the initial contribution (PAC) or from the fund value.

Hence, there is a lot of confusion on the actual charges one has paid. To clear this confusion and enable policy buyers to have a clear understanding of the product costs, Irda has prescribed one cap on all charges put together.

Let's see if this cap really helps people understand the charges or if a better framework is needed. Irda's cap is expressed in terms of the difference between the gross and net yield to the customer. The net yield is the gross yield adjusted for all charges. For insurance contracts of a tenure 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 contracts 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.

Additionally, the following should be observed:

 

Extra premium due to underwriting emanating from extraordinary health conditions, cost of all rider benefits, service tax on charges and any explicit cost of investment guarantee shall be excluded in the calculation of net yield.
 

At the time of sale, for benefit illustration purposes, the insurer may assume a growth rate of 10 per cent per annum of the investment as a model, as suggested by the Life Council.
 

At the time of maturity, 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.

The circular will be effective from October 1, so all products approved by Irda on or after October 1 will be governed by the provisions of this circular. All existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009.
 

NON GUARANTEED Policy Values @ 10% Gross Return
POLICY A
Policy Premium	Premium Allocation Charge	Net Invested Premium	Policy Admin Charge	Mortality Charge	Fund Mgmt Charge	Total Charges	Fund Value
100,000	54,659.00	45,341.00	2,905	1,296	456	59,316	45,092
100,000	7,508.00	92,492.00	14,329	1,238	1,367	24,442	133,730
100,000	7,508	92,492	2,905	1,160	2,367	13,940	242,209
100,000	5,005	94,995	2,905	1,039	3,540	12,489	363,191
100,000	5,005	94,995	2,905	875	4,819	13,604	495,109
100,000	5,005	94,995	2,905	659	6,213	14,782	638,989
100,000	5,005	94,995	2,905	368	7,735	16,013	795,975
100,000	5,005	94,995	2,905	15	9,395	17,320	967,299
100,000	5,005	94,995	2,905	-	11,204	19,114	1,153,881
100,000	5,005	94,995	2,905	-	13,175	21,085	1,357,063
Your illustrated yield to maturity (gross of mortality charges) based on 10% gross return is 5.55%
POLICY B
Policy Premium	Premium Allocation Charge	Net Invested Premium	Policy Admin Charge	Mortality Charge Charge	Fund Mgmt	Total Charges Charges	Fund Value
100,000	14,339	85,661	2,058	1,172	1,330	18,899	89,436
100,000	4,412	95,588