ULIPS-Is Insurance firms cheating Common Man
August 3, 2010 1 Comment
A Friend had joined BIRLA SUN Life ULIP and they charge closed to 40% of premium as Management charges
Now, buying Ulips will cost less
TNN, Jun 29, 2010, 01.51am IST
MUMBAI: Insurance sector regulator IRDA on Monday came out with a set of guidelines directing life insurers to offer unit-linked insurance plans (Ulips) at a much lower cost to buyers, while simultaneously offering higher life cover though with a longer lock-in period.
While life insurance customers will benefit, the new rules could lead to a substantial cut in commission for insurance agents and force life insurance companies to drastically cut costs, leading to lower sales, industry players said.
Interestingly, IRDA’s decision to change rules governing Ulips came within three months of stock market regulator Sebi saying that Ulips were investment products as well (on which Sebi is the sole authority) and banning 14 life insurers from selling Ulips without its permission.
IRDA, on Monday, said that insurers will now be allowed to charge up to 4% on annual premium paid on Ulips for the first five years, and thereafter charges will be reduced during the tenure of the policy. For plans of 15 years and above, the charges will be restricted at 2.25% of the yearly premium.
These cut in charges would make Ulips more attractive to the buyers since they will have to pay lower charges for the same premium they paid earlier. In the long run, this will add to the Ulip buyers’ funds. “Lower charges will benefit the customers,” said GV Nageswara Rao, MD & CEO, IDBI Fortis Life Insurance. However, this could mean lower commission to insurance agents which in turn might affect sales of ULIPs, Rao added.
The life insurers will also have to cut their expenses and becuase of lower sales, it may affect their topline as well as bottomline. “The capping of expenses guidelines have been made very stringent, this will have quite farreaching consequences for the industry,” said Kamesh Goyal, country manager & CEO, Bajaj Allianz Life Insurance. “Small regular premium policies will become unviable, thus a large proportion of people who were paying premium of less than Rs 15,000 or so a year will suffer badly,” Goyal added.
There is also fear in the insurance industry that the new commission structure might not be able to sustain an insurance agent’s income and this channel could suffer.
IRDA has also increased the lock-in period for all Ulips from three years to five years now, including the top-up premiums. The decision is expected to make these products more like long-term financial instruments that can provide risk protection. Longer lock-in would also discourage those insurance buyers who often entered Ulips, which are market-linked products, for short term gains. The regulator also increased the insurance cover on such products to 10 times of the first-year premium compared to five times now.
In its Monday circular IRDA also said that all pension products should have a guaranteed return of 4.5% per annum. However industry players feel this could be difficult to offer. “Providing a fixed guaranteed interest rate could be a challenge. The returns here should be linked to market-related rates,” said Rao of IDBI Fortis