Taking Charge

Written by Saikat Neogi | Updated: Nov 2 2012, 08:05am hrs
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 doesnt 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. The new draft guidelines have put a cap on fund management charges in respect of each of the segregated fund, which will not be more than 135 basis points.

Analysts say before one finalises a plan, it is important to check all the charges that the company will levy and ensure that you buy the right insurance product. The method of computation of mortality charge will now have to be explicitly specified in the policy document and the mortality charge table will form part of the policy document. Mortality charges is essentially the cost of the insurance cover, and the charge will vary with age, health, tenure, coverage amount and even the occupation of the life assured.

Mortality charges will be exclusive of any expense loadings levied by cancellation of units and the charge will be levied at the beginning of each policy month from the fund.

The mortality charge table will have to be guaranteed during the contract period and will include pure risk charges for the cover offered and will not include any allowance for expenses or any other parameters. The charges will have to be demonstrated with the support of insurer's own experience and will have to be expressed as per R1,000 sum at risk for each age.

Currently, most life insurance companies in India use the mortality table used by the countrys largest insurer, Life Insurance Corporation of India (LIC). The younger the person, the lower will be the mortality charges and it will increase as one grows old. So, it is always advisable to take a life cover at a younger age, and pay lower mortality charges on a life cover.

Insurers can levy a guarantee charge as a percentage of the value of assets and will be appropriated by adjusting the net asset value. The regulator has capped the guarantee charge at 50 basis points. The policy administration charge, which will be the expenses other than those covered by the premium allocation charges and the fund management expenses. The policy administration charge will have to be expressed as a fixed amount or a percentage of the premium or a percentage of the sum assured. It will be levied at the beginning of the each policy month from the policy fund by cancelling units for an equivalent amount.

Switching charges will be levied for moving money from one fund to the other within the product. The charges per switch will be levied at the time of effecting the switch and it will be either a flat amount or lower of a flat amount or percentage of the fund value. Many insurers give one fee switch in a year, which, if done effectively, can save some charges.

Riders are an important part of any insurance plan and give additional protection to policyholders. Rider charge is levied separately to cover the cost of the rider. Riders are add-ons and give the policyholder the option to enhance the risk cover. It can sometimes be customised according to one's needs and can be bought in conjunction with the base policy at the time of the initial purchase. However, riders are optional and provide pure risk cover and do not have any investment or savings element to them.

In a life insurance policy, the rider can be waiver of premium, guaranteed insurability, disability income, accidental and accelerated death benefit. The critical illness rider is important in life insurance as it covers heart attack, stroke, cancer and surgery. Typically, riders are bundled with the base policy and do not have any additional administrative charges.

In fact, Irda has now capped the maximum premium that is paid for riders, which cannot be more than 30% of the base policy cost. Thus, any benefit arising out of an individual rider cannot exceed the basic sum insured.

Policyholders can go for a critical illness rider where the sum insured is paid to the policyholder in case of critical ailment, such as heart attack, renal failure and cancer. One must check the illnesses covered and the exclusions and be clear that critical illness benefit rider and a pure mediclaim policy are two separate covers. A critical illness rider enjoys tax benefit under Section 80D and proceeds received in the case of a claim are tax exempt under Section 10 (10D) of the Income Tax Act.

The draft guidelines underline that the rider charge table will form a part of the policy document and the charge will reflect the pure risk charges for the cover offered and cannot include any allowance for expenses or any other parameters. The charge will have to be reasonable and consistent with the prescribed mortality or morbidity tables and will have to expressed as per R1,000 sum assured for each age.

The riders will be approved by the insurance regulator and then attached to the linked products. Insurers can also levy a partial withdrawal charge. The charges, as filed under file and use procedure and approved by the regulator, cannot be modified or changed without obtaining its prior approval. Analysts say the new charge structure is transparent and policyholders can take an informed decision now. All charges other than premium allocation and mortality charges will have an upper limit and the disclosure made in all sales materials and the policy document.