ULIPs get more transparent with IRDA move

WEALTH received many queries from readers enquiring about Unit Linked Insurance Plans (ULIPs). The common thing among these readers was that they were tricked into buying ULIPs. They were told they could earn returns that are much better than any other investment, and the premium could be paid only for three years if they wanted to. This is most common pitch for selling ULIPs. And they are classic examples of mis-selling.

If you have been a victim too, here is some relief for you. In a move to curb such malpractices of agents, Insurance Regulatory and Development Authority (IRDA) has taken some initiative. In a circular released, the regulatory body has said that the premium paid in the second year should at least be 75 per cent of the premium paid in the first year. In other words, let’s say if you have paid a premium of Rs 10,000 in the first year, the premium paid in the second year should at least be Rs 7,500 in the following year.

Why this move?

It all began in the year 2007 when IRDA had issued a norm that allowed insurers to reduce the premium in ULIPs, provided a certain amount is maintained throughout the policy term. But this norm seemed to be misused by insurance agents to sell ULIPs like single premium plans. This norm when introduced was done with the intention of bringing in more flexibility. But insurance agents misused this clause and hence IRDA has now asked them to conform to the new norm beginning April 1, 2009.

How will it work?
Agents receive commission as high as 25-30 per cent in the first year of a ULIP policy compared to single premium policies that give only 2 per cent commission. Hence, insurance agents push for regular policies and pay little attention to renewal of these policies. They concentrate more on selling new ULIP products that will get them more commission.

The reason why IRDA took this move was because of the fall in renewal premiums. Not just this, the regulator has now asked insurers to pay back the commission back to policyholders if the premium is less than 75 percent of the first year’s premium.

Example
If you pay Rs 10,000 premium in the first year, the agent will get Rs 3,000 as commission in the first year (considering the commission is 30 per cent). You reduce your premium in the second year to Rs 7,000. According to the new norm, the insurer will have to treat the difference in the first and second year premium, ie, Rs 3000 (Rs 10,000 to Rs 7,000) as single premium plan. This is because Rs 7000 is less than 75 per cent of Rs 10,000 paid in the first year. So, the insurance plan will automatically be treated as a single premium plan and the agent will be given commission that is applicable on single premium plans, ie, 2 percent.

So what happens to the 35 per cent commission paid in the first year? The insurance company will minus the charges of regular premium plan from single premium plan, ie, 35-2 percent. So, the agent will be given only 2 per cent commission and the remaining, ie, 33 per cent will be deposited back into your account.

CEO of apnainsurance.com, Harsh Roongta says, "IRDA has taken an excellent step to curb agents from mi-selling regular ULIP as a single premium plan." However, this will be applicable on new potential policyholders and not on existing ones.

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