Plus plus ça change, plus c'est la même chose. (The more things change the more they remain the same)
Don’t expect insurers to change their ways.
Notwithstanding the new norms put in place by the Insurance Regulatory and Development Authority (Irda) to curb the exorbitantly high commissions paid to the agents on unit linked insurance plans (Ulips), insurance companies continue to not only pay high commissions on these policies but also recover the amount from policyholders, albeit in a different form. Here’s how.
Old game
In order to pay high commissions to their agents, companies used to recover a very high premium allocation charge from the first two annual premiums paid into the Ulip.
Ulips are essentially investment plans, which also offer some amount of insurance cover.
Usually, the individual taking the policy has 4-6 choices while choosing his investment fund, ranging from funds that invest 100% in equity to funds that invest 100% in debt securities. For the insurance cover, on the other hand, the insurance company charges a mortality premium every month.
Let us say you decided to invest in an Ulip paying a premium of Rs 50,000 every year for the duration of the policy. Before investing this money in the investment fund chosen by you, the insurance company deducted what was called a premium allocation charge. So if your policy had a premium allocation charge of 30%, Rs 15,000 (30% of Rs 50,000) would be deducted as a premium allocation charge. This money was used to pay high commissions to the agents. The remaining Rs 35,000 (Rs 50,000 - Rs 15,000) was invested.
This charge was anywhere between 15% and 71% in the first year of the policy, depending on the Ulip chosen. The charge in the second year was not as high as in the first year, but was substantial nonetheless.
New game
Insurers have lately started cutting the premium allocation charge and in some cases this charge has fallen to under 10% of the first year’s premium, partly to comply with the new regulation and partly to use it as an advertising gimmick.
But things aren’t always as simple and straightforward as they seem. The insurance companies continue to recover the “high commissions” from the Ulip investor.
Policy administration charge
In order to recover the regular policy administration costs, insurance companies charge a fixed amount of Rs 40 to Rs 60 a month. This charge is recovered by cancelling the units that have accumulated in the investment fund.
Some insurance companies, which have cut down on the premium allocation charge, have linked the policy administration charge to the amount of premium paid into the Ulip.
Let us say the policy administration charge stands at 0.8% of the annual premium per month. Thus, if you are paying a premium of Rs 50,000 per year, the policy administration charge works out to Rs 400 per month or Rs 4,800 per year (Rs 400 x 12).
On a premium of Rs 50,000, this works out to 9.6% (Rs 4,800/ Rs 50,000). Over and above this, if the policy also charges a premium allocation charge of 10% in the first year, nearly 20% (10% + 9.6%) of your money is not being invested.
Since the policy administration charge is recovered by cancellation of units that have accumulated in the investment fund, chances are you may not even be aware that such a charge is being recovered.
The other way
This is not the only way insurance companies are indirectly charging their commission expenses to the policyholder. The other interesting trick that companies have come up with is linking the policy administration charged to the sum assured or the insurance part of the policy.
Let us say you pay a premium of Rs 50,000 and have a sum assured of Rs 2.5 lakh on the policy. On this the company charges a monthly policy administration charge of Re 1 per Rs 1,000 of sum assured. This means, on a sum assured of Rs 2.5 lakh, a policy administration charge of Rs 250 per month or Rs 3,000 per year will be recovered. This works out to 6% of the premium of Rs 50,000.
The company charges an additional Rs 4.25 per month per Rs 1,000 of basic sum assured for the first two years. On a sum assured of Rs 2.5 lakh, this works out to Rs 1,062.5 per month or Rs 12,750 per year. On a premium of Rs 50,000, this works out to 25.5% (Rs 12,750/Rs 50,000). Add this to the 6% policy administration charge, and you have a charge of 31.5% being made to the first two years’ premiums.
Now, even if the company has a zero premium allocation charge, it is still deducting nearly one-third (31.5%) of the premium being paid in the first two years, though in a roundabout manner.
The big question
The math basically proves that not much has changed in the way insurance companies operate. They continue to pay high commissions to their agents and get policyholders to pay for it, although the method has changed.
A few questions will be in order here. How can the cost of administering one policy be different from the cost of administering another policy? And how can the cost of administering the policy go up with the amount of premium being paid or the sum assured of the policy holder?
The insurance regulator has as usual cleared these policies and turned a blind eye to these new shenanigans of insurance companies.
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