AFTER much heartburn over high fees and charges on ULIPs (unit linked insurance plans), there's finally some good news for investors! The insurance regulatory body, the IRDA, has implemented well defined changes that can make a significant impact for investors looking to invest in ULIPs. According to the norms, there will be a cap on overall charges that the insurance companies can impose upon the ULIPs.

The norm
For all ULIPs which have a maturity of up to 10 years, the difference between the gross yield and net yield would have to be maintained at 300 basis points or 3 per cent. Out of this, the investment management fee would not be more than 1.5 per cent. For ULIPs with a tenure longer than 10 years, the overall cap would be 2.25 per cent with an investment management fee cap of 1.25 per cent.

Remember that charges here would include allocation charge, administration charge, mortality charge and all such charges by any other name.

You will notice that the cap on overall charges become lower as the insurance term increases. This move is expected to encourage consumers to opt for long term insurance and investment rather than a short term plan, which is low in utility. This is expected to come into effect by October 1, 2009.

The jargon
The jargon here are the words 'gross yield' and 'net yield'. So let us simplify them:
Gross yield: This is the yield generated by the ULIP before all charges are deducted
Net yield: This is the yield generated by the ULIP after all charges are deducted

Illustration
Let us take an example where the annual premium on a ULIP is Rs 20,000 and the term is 10 years. Let us assume that the charges are as follows:
- Allocation charges
First year allocation charge: 25 per cent of premium
Second year allocation charge: 15 per cent of premium
Third year allocation charge: 5 per cent of premium
Fourth year onwards allocation charge: 3 per cent of premium
- Administration charges: Rs 30 per month
- Fund management charge: 1.5 per cent of fund value

Also let us assume that the fund grows at a rate of 10 per cent per annum. For the ease of calculation we have ignored mortality charges.

We need to arrive at two numbers, the gross yield and the net yield.
Gross yield: If the fund grows at 10 per cent every year for 10 years, the fund value at the end of 10 years without taking the impact of charges would be Rs 3.3 lakh. That would translate to an yield of 11.98 per cent.
Net yield: If the fund grows at 10 per cent every year for 10 years, the fund value at the end of 10 years after taking the impact of charges would be Rs 2.7 lakh. That would translate to an yield of 8.07 per cent.
Difference: The difference between gross yield and net yield is 3.91 per cent.

Next page: Find out how much you save because of the new norms

1 | 2 |  

e-mail: Deepa Venkatraghvan

Suggest a story idea! Write to us!