ULIP cap: Advisors face tough times

ET 25/7/09

MUMBAI: After mutual fund (MF) agents, it is the turn of insurance advisors to feel the heat. If the recent IRDA notification capping charges on unit linked insurance plans (ULIPs) also includes premium allocation charges, it may be the end of lucrative first year premium for insurance advisors.

However, the good news is that financial experts are not sure at the moment whether the new notification also covers premium allocation charges. Only a few believe that it does.

According to the notification , the difference between the ‘gross yield’ and ‘net yield’ of ULIPs shouldn’t exceed 3% for policies of less than 10 years and 2.25% for longerterm policies. Gross yield is the fund’s returns on investment and net yield is what it gives to the policyholder. Of these, fund management charges are capped at 1.5% for the shorter-term policies and 1.25% for longer-term ones.

‘‘There is a lot of confusion about whether the cap on charges applies year-onyear or on a cumulative basis over the years,’’ says Suresh Sadagopan, chief planner, Ladder7 Financial Planners. ‘‘Also, when you speak about gross yield, it is based on the fund allocated to investment and returns on it. So it is not clear whether the cap includes premium allocation also,’’ he adds.

He says he would wait for a clarification before reaching a conclusion, a sentiment shared by other experts. ‘‘ Probably, IRDA was clear in its mind, but because there are doubts raised in various circles it would be better if it comes with a clarification,’’ says an insurance experts, who is not 100% sure.

However, some people like Rajiv Jamkhedkar, CEO, AEGON Religare Life Insurance, believe the cap is applicable on all charges. ‘‘We believe the cap on difference between gross and net yields applies to everything, including premium allocation charges. We are assessing the impact, but I don’t think we have to really modify any of our existing plans as they comply to the new rule,’’ he says. The IRDA circular comes into effect from October 1, and all existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31 by insurance companies.

If what Jamkhedkar says is true, it could be bad news for insurance agents who were making a killing by pushing ULIPs, which used to pay hefty commissions in the initial three years of the policy. In fact, thanks to the fancy commissions, today around 80% of the policies sold are ULIPs.

As for investors, the next few months are going to be trying times. From August 1, the Sebi directive of no-entry load on mutual funds will kick in.

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