Insurers contend that ULIP charges have come down in line with the new regulations of IRDA. But that is only half the truth.
Earlier, the insurers took the premium allocation charge between 15 to 71 per cent of the first year's premium depending on the ULIP chosen. Typically, the schemes used to charge around 25%. They would use this money to pay high commission to its agents.
This is by and large now 0 to 18 per cent. Roughly they are charging around 15%. That is a saving of 10%. But that is not to say that this amount is invested.
Enter the policy administration charge which the insurers have lately turned into a money spinner. As per the name it is a charge made to a policy holder for administering the policy and sending the regular statements.
Now it is linked to the premium being paid. So the reduction in premium allocation charge has not quite down brought down the charge by the investor.
In spite of whether one is paying a premium of Rs.10,000 or Rs.1 lakh, the cost of administration remains the same. So why should the policy administration charge be different for different policies? What could possibly justify linking this charge to the premium paid?
The insurance companies seem to have acted in cohort to exploit the loopholes and get around the new regulation, which seeks to lower the overall expense structure of ULIPs. Yet, rather than plug the loopholes, IRDA has chosen to let these policies pass. Insurance companies may well be cocking a snook at the regulator.
SEBI has gradually been chipping away at mutual funds and ensuring the agent commissions keep going down. However, IRDA has done nothing similar. Small wonder, the distributors are more interested in selling ULIPs than MFs.
As for investors, the old combination of tax-saving MFs, PPF and a term insurance would work far better than ULIPs, given that the real charges are still on the higher side.
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