Insurance firms levy high charges on Ulips but investors often don’t realise this

Most investors have welcomed the Securities and Exchange Board of India’s recent move abolishing entry loads on mutual funds. But what about the fee structure on insurance products like unit-linked insurance plans (Ulips)?

Ulips basically combine an insurance policy with a mutual fund-type of investment product. They’re among the most highly sold policies in India. But most investors are still unaware of the high charges that insurance firms levy on Ulips.

“Ulips continue to be mis-sold,” asserts certified financial planner Gaurav Mashrudwala.

The fact is that insurance companies levy nine types of charges on Ulips. The chief of these is the premium allocation charge (PAC), which is a percentage of the premium paid and which the insurance firm deducts towards its expenses. This can range from two to 25 per cent of the premium. It is typically front-loaded so it is usually deducted in the first three years of the policy.

For instance, the Birla Sun Life Insurance ClassicLife Premier plan has a PAC of 13 per cent in the first policy year and 4 per cent each in the second and third years.

So if you paid a premium of Rs 100,000, Rs 13,000 would be deducted as PAC in the first year and only Rs 87,000 invested in your chosen equity or debt fund type.

Financial trainer P V Subramanyam though says, “Consumers do a lot of research to buy a Rs 4,000 DVD. But when it comes to a Rs 1 lakh investment product, their brain freezes and the only question they ask is where should I sign. Responsible buying is far more important than mis-selling.”

The problem with Ulip arises because the charges are front-ended so agents get their commission in the initial years. So insurance agents will often tell Ulip-holders to close their plan after three years and opt for another one. “If you’re buying a 30-year product but change it after three years, you’re bound to find the charges exorbitant,” says Subramanyam.

Ulips also carry fund management charge, policy administration charge, mortality charge (or life insurance cover), and surrender and switching charges. Many of these are recovered by cancelling units of an equivalent amount.

“Most investors look at NAV growth to judge performance. But it’s difficult for them to calculate the actual return when the number of units is reduced,” says Mashruwala.

Subramanyam has some advice for Ulip-holders. For one, since it’s a long-term product, investors should stay invested for at least eight years. Also look for Ulips with asset management charges of one per cent or less.

He also advises investors to take a minimum premium cover and do top-ups instead to increase the policy amount. For, the premium allocation charge is lower on a top-up than on the regular premium. And since there are no limits on top-ups for pension plans, you can opt for a unit-linked pension plan, he advises.

“How much return you get on your Ulips is a function of your IQ. If you don’t want to do the hard work, don’t buy it,” says Subramanyam.