Spend, Save and Invest Smartly
You have learnt in the previous article how Ulips give you twin benefits of Insurance + Investment. Now you will learn why reforms were necessary to save Ulips.
Insurers (Life Insurance Companies) encouraged their agents to sell more Ulips paying them a huge commission. You paid a premium to invest in the Ulip and life insurance agents pocketed most of this premium as a commission.Simple : You paid the life insurance agents commissions.
Shocker : Checked the value of your Ulip?
Value less than half the money you paid as a premium.
Why The money left behind after paying all the charges was not sufficient to make a good investment in equity (Share markets). Worse you could not withdraw the money left behind for 3 years (Compulsory 3 year lock in)
Surrender the Ulip in frustration after the first year? You get back nothing. (Entire first year premium paid as a commission/ charge to Insurer) Result : You lost faith in Ulips?
This begs the question did greedy Insurers kill the goose that laid golden eggs? Game changer : IRDA steps in with a series of reforms in September 2010 to save Ulips and the life insurance industry.
Reduction in premium allocation fees
Ulips charge you a premium allocation fee. This money is used to pay commissions to agents who sell you Ulips. Before September 2010 commissions were 30-35% of the premiums you paid in the initial years of the policy.
You pay a premium and 30-35% goes to the life insurance agent as a commission through premium allocation fees.
After reforms post (September 2010) Now you pay a premium and 8-10% goes to the life insurance agent as a commission through premium allocation charges.
Increase in life insurance
Ulips used to charge you very less as mortality charges. (In the bargain giving you almost no life insurance). So why take the Ulip at all?
If you invest in a Ulip with maturity less than 10 years the maximum charges (total of all charges) cannot be more than 3% of the premium you pay. If you invest in a Ulip with maturity more than 10 years the maximum charges (total of all charges) cannot be more than 2.25% of the premium you pay.
If you had surrendered the Ulip within the first year (before reforms) you would have got nothing back. Surrender value (Amount payable on surrender of the Ulip) would be nil.
After reforms post (September 2010)
The maximum surrender charges cannot be more than INR 6000 if you surrender the Ulip in the first year. The surrender charges reduce to a maximum of INR 2000 if you surrender the Ulip in the fourth year and are zero by the fifth year.
The compulsory 3 year lock in of the Ulip has been increased to 5 years. Yes …Ulips have a lock in of 5 years. In the previous article you learnt never to invest in a Ulip unless you know why you are investing in it. Ulips give you good returns but only if you stick with them. You have to invest time in a Ulip. By investing in Ulips for 5 years you are able to benefit from higher returns in equity (Stock market). Surely forced higher returns are good for you.
If you invest in an equity oriented Ulip (most of your investment is in equity) you can avail a loan against 40% of the value of the Ulip. (40% of the NAV of the Ulip). It is 50% of the value of the Ulip if you take a loan against a debt Ulip (Invests mainly in fixed income/debt). This article tells you there are no shortcomings in a life insurance product that reforms cannot overcome.Ulips have been saved by reforms.