Understanding the jargon

Reading any statement – whether of a bank, a mutual fund or a unit-linked insurance plan (Ulip) – can be a nightmare. Often, the jargon can stump a customer, Nitin Desai discovered.

Desai’s first Ulip statement showed that while he had invested Rs 50,000, only Rs 35,000 had been used to buy the units. On approaching the insurance agent, he learnt about the premium allocation charges (PAC), or the percentage that is paid to the insurance agent for the first few years. In Desai’s case, it was as high as 33 per cent of the first year premium. Meanwhile, the statement had a list of other charges that he did not understand.

“In a Ulip statement, even a single-premium policy will show several transactions during the full tenure, since the number of units is not fixed and charges are deducted from the units. Switches further complicate matters as purchase price calculations will change again,” says Anil Rego, CEO, Right Horizons.

Most insurance companies follow different formats and use diverse terms in their annual statements. A few sections, common to all, will be a summary of the policy, a transaction report on the fund’s growth and a section detailing the various charges. All statements include basic information regarding the policy.

Transaction statement
The ‘transaction activity report’ is an important section, as it traces month-on-month activity in the fund. Other columns show monthly policy charges deducted from the premium, the unit’s price or net asset value (NAV), the number of units bought at that price and the fund value. The price per unit (NAV) is proportional to the number of units held on the transaction date.

Monthly policy charges
This section gives an account of month-on-month charges. The columns describe transaction dates and the various charges levied. Some of them will be:

• Mortality charge or life-risk charge: This is the cost to insure the policyholder. The charge depends on several factors like age, amount of coverage, state of health, and so on. However, monthly mortality charges may vary, depending on the number of units held on the transaction date.
• Policy administrative charges: These are the charges for administering the plan. This could be a flat charge throughout the term, or may vary at a pre-determined rate.
• Tax duties, levies and total charges: They are the other charges.

If the policyholder takes such extra benefits as an ‘extra health benefit’ (adding a health policy to the existing policy), the option to switched funds or for partial withdrawals, charges applicable to these facilities will be mentioned in the statement.

A Ulip statement should typically have these parameters. Besides the usual – policy and fund name, client number, date of issuing the policy and date of birth of the policyholder – there will be some other critical information:

• Premium: A regular mode means the premium is paid annually. A single premium indicates a one-time payment.
• Sum assured: This is the risk cover for the policyholder, and is a function of the single premium in most cases.
• Life assured: Of the policyholder. In case, the life assured is of a minor, the name would be stated under ‘proposer’.
• Contract status: ‘In force’ suggests a continuing policy. ‘Paid up contract’ means the premium is not being paid. If the policyholder stops paying the premium before the lock-in period has expired, it will read as lapsed.
• Term and plan maturity date: This indicates the period and the exact date the cover ends.
• Next due date: The date on which the next premium is due.