Lot of buzz had been created about higher commission payouts and charges under different heads charged by the insurance companies in ULIP's. This all started after the public spat ensued between the two financial regulators SEBI and IRDA.
Result was rationalisation of charges in Ulips, which made them a slightly better option for people who view it as the most convenient way of buying life cover with an investment element.
Will not discuss how ULIP's have been shaped up after the newer regulation. But will concentrate on bigger picture which everyone including media as well as regulator missed out i.e. traditional plans.
Traditional plans basically come with certain fixed premium for particular sum assured depending on the age.
Majority of insurance business done by state run insurance company comes from this basket.
Even ULIP in older format was better (Atleast in one sense) that it used to disclose all the charges upfront, whereas charges under traditional plans are hidden . The regulator and insurance cos. easily moved away with need of regulating the traditional plans, which is still creating a big hole in policyholder's pocket.
As the expense structures of these plans are not available let us review the cost attached to it.
- First year commission paid to agent is somewhere between 25-40%.
- For subsequent year 2 & 3 it is 5% - 7.5% in most of the cases.
- Nearly 5% for rest of the term.
- Commission to Development officer between 6 to 8% (Only for 1st year)
- Salaries and other benefit to employees.
- Exps. of Management & overheads
- Taxes
- 5% of profit to Govt. of India
- Policy claims
Historically, MIP schemes have generated return between 9-10% on a longer period.
In addition to that Bonus declared under traditional plans are never compounding. But it just adds up for all the years and paid at the time of maturity.
After accounting for expenses investor themselves can evaluate, what return they can expect from this plans.
For ULIP's under newer regulation IRDA capped the difference of Gross and net yield as 2.25% for term more then 10 years. Whereas from above calculation it is clear that difference will be extraordinarily high in case of Traditional plans.
The question is not that the ULIP is better or TRADITIONAL plans.But I wish to emphasize on the fact that both investments and insurance has to be managed separately.
As insurance is a push product the cost is always going to be high, so buy insurance from the insurance company and plan investment with lot of options available in the market or seek advice of a practicing Certified Financial Planner.
For insurance one should always look at Term assurance which can get you a bigger and required insurance coverage at lower premiums.
2 comments:
Good show Raj, very well written. It is important to understand that we buy insurance policy and not invest in insurance - you've brought out this point very well.
good one Rajbhai...
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