DNA has a report on ULIPs and how some insurance companies are charging as high as 48% of first year premium towards policy administration charges.
Earlier, insurers used to deduct a substantial portion of the premium being paid in the first year as premium allocation charge. If a policyholder was paying a premium of Rs 1 lakh per annum, the premium allocation charge in the first year could be 40%, so Rs 40,000 would be deducted. The money would be used to pay high commissions to agents.
Only the remaining Rs 60,000 (Rs 1 lakh-Rs 40,000) would get invested and against this investment units would be given to the policyholder depending on the prevailing net asset value.
This charge has now come down. But what insurers lost has been more than made up through a much higher “policy administration charge”.
This charge includes the cost of administering the policy, sending regular statements to the policyholder, etc. Typically, it is Rs 40-60 per month or around Rs 500-Rs 700 per year.But that’s not how things work. In many cases, the policy administration charge is now a certain proportion of the premium paid in the first year of the policy.
In others, it is a portion of the sum assured or the insurance cover on the policy.
It’s a confirmation of what I had to say about selling ULIPs to unsuspecting, ill-informed customers
Now, beware of the policy administration charge masquerading as premium allocation charge!
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