Life insurers will soon have to use uniform definitions for charges that they levy on all unit-linked insurance products (Ulips), with the regulator making it essential for companies to distribute the overall charges in an even way.
The premium allocation and policy administration charges will have to be spread evenly during the first five years of the policy contract without any fluctuation. The charges could change from year to year in a reasonable manner, so that the difference between the maximum and the minimum charges during the first five years doesn’t vary by more than 1.5 times.
These changes are part of the draft guidelines on structured products issued by the Insurance Regulatory and Development Authority (Irda) recently. The premium allocation charge, which is the percentage of the premium that will be deducted from the premium for allocation of units, will have to be explicitly stated and could vary by the policy year in which the premium is paid, the premium size and the premium type, which could be regular, single or top-up premium. For example, if the premium you pay is Rs 1,000 and the premium allocation charge is 10%, then R100 will be deducted from the premium and the balance Rs 900 will be invested to buy units.
The insurance company will charge fund management fees for making investment on your behalf and conducting research for investing in the best stocks for maximum returns and it will be adjusted against the units. The charge is levied at the time of computation of the NAV, which is usually done on a daily basis. So, if the fund management charge is 1% per annum payable annually and the fund value at a point of time is R100, then after the charges, the fund value will be Rs 99.
Earlier, the sector regulator had capped the fund management fees at 150 basis points for policies with less than 10 years of maturity and 125 basis points for those above 10 years of maturity. Moreover, an insurance company will have certain overheads and administration costs and the policy administration charges would take care of these expenses.