Aug 28, 2009

Revised Cap on ULIP Charges - What a Sham!

As quite expected IRDA eventually bowed to the pressure from life insurance companies and diluted the impact of earlier circular (imposing the cap on ULIP charges) by removing the mortality charges from the cap without reducing the overall ceiling. For detailed version of the original circular and its review, see: Investor’s Reforms (#3) - Cap on ULIP Charges.

Following are the amendments made by the IRDA as per circular no. 20/IRDA/Actl/ULIPs/2009-10 dated 20th August, 2009:

1. Mortality and morbidity charges excluded from the cap. However, the overall cap on ULIP charges (3% for short term ULIPs and 2.25% for long term ULIPs i.e., more than 10 years) remains the same.

2. Uniform sub-limit for Fund Management Charges (FMC) irrespective of ULIP tenor. The revised sub-limit for FMC is 1.35 per cent for all kind of ULIP policies i.e., both ULIPs up to 10 years as well as ULIPs for more than 10 years. Earlier the FMC sub-limit was fixed 1.50% for ULIPs having tenure up to 10 years and 1.25% for ULIPs with tenure of more than 10 years.

3. No surrender charges can be levied from 5th year onwards. This is a new addition but hardly of any significance.

I’ve had doubts about the intentions of IRDA in issuing the earlier circular regarding capping ULIP charges. Why make so much noise when ultimately there’s not going to be any significant change in the current scenario?

Actually, it was a well calculated move designed to fool the gullible consumer / investor into believing that IRDA is fully committed towards safeguarding their interests. In reality, the entire exercise seems to be a shrewd marketing gamble to make ULIPs more popular.

Photo by funadium

Indeed, it is a complete sham because there won’t be any significant increase in the ‘net yield’ or the IRR of the ULIP. Furthermore, due to so many exclusions, the actual expense ratio is in fact going to be lot higher than the prescribed limit of 3% / 2.25% and which you’ll never know initially thereby making a mockery of the transparency.

In my view, at least it should be made compulsory for the ULIP illustrations to show (based on assumed gross yield of 10%) two figures of ‘net yield’, first one in accordance with the circular (i.e., by excluding the exclusions) and second ‘net yield’ by including all the charges (i.e., by also including the excluded charges) in the calculation so that a customer can make an informed decision.

If you can’t reduce the cost, at least make it more transparent. What an impossible demand! Asking for transparency and that too from an insurance industry!

To conclude, it is our folly to equate IRDA with SEBI which is truly an independent regulatory authority working in the interest of the investors.

What do you think?

Also see:

1. Cap on ULIP Charges – Review of IRDA Circular

2. Best ULIPs based on IRR

3. ULIPs – Top 10 FAQs

4. New Tax Code: Impact on Life Insurance

5. Term Plans: Lesser Known Facts

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