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Economy

Hiding ULIP Commissions: Riding on Confusing Customers

A friend recently told me about Birla Sun Life’s Dream Plan and how they had “zero commissions”. The skeptic that I am of greedy ULIPs and insurance agents, I decided to investigate. The relevant section is here:

Premium Allocation Charge

No premium allocation charge is deducted from your policy premium so all of your policy premium will be invested in the investment funds of your choice.
For top-up premiums, we will first deduct a 2% premium allocation charge and then invest the remaining 98% in the investment funds of your choice.

Fund Management Charge

The daily unit price of each investment fund is adjusted to reflect the fund management charge. Currently the charge is 1.00% per annum for Protector, Builder and 1.25% per annum for Enhancer, but we may increase this charge in any time in the future subject to a maximum of 1.50% per annum.

Policy Administration Charge

The policy administration charge will be deducted monthly by canceling units proportionately from each investment fund you have at that time. The annual rate per 1000 of Basic Sum Assured is shown in Schedule B. We may increase this charge at any time after the 4th policy year, subject to a maximum increase of 5% per annum since inception.

This would make you think there are NO commissions because this is usually in “Policy Allocation Charge”, which is zero for this policy?

Wrong.

They just moved the stuff around, and earlier where it would clearly be highway robbery (35% premium allocation charge etc.) now it’s highway robbery by a guy in a suit and tie.

Let’s look closely at the “Policy Administration Charge”. In most other cases, this refers to a Rs. 40 to Rs. 100 per month fixed charge. But not in this plan. The “Schedule B” is a confusing table like this:

(Basic Sum Assured is per 1000 of Guaranteed Maturity Benefit. Policy Administration Charge – annual rate per 1000 of Basic Sum Assured)

How is the policy administration calculated? First, we get the Basic Sum Assured.

My friend had a plan with “guaranteed” benefit of 11.76 lakhs, for 20 years. He pays a premium of 48,000 a year. For that amount and the “100% guaranteed option” he comes in Band 4 (just under 12 lakhs). The Basic Sum Assured is Rs. 590 per 1000, which for his guaranteed amount is Rs. 693,840.

Note that this is the real insurance – the real “guarantee” is only at maturity. The actual amount they will pay if you die, is the basic sum assured plus about your premiums minus charges, with a 3% return. That’s not much, as we will soon see.

Then, for this basic sum assured, you get the policy admin charge for Band 4, 20 year term. This is 2.98. And the first three years has a charge of 12.91. For the first year it adds up to 15.89, per 1000 of basic sum assured. For the 693.84K my friend had, it would be Rs. 11,025 per year.

Remember, he pays Rs. 48K a year as premium. He pays 11,025 as “policy admin charge” – a nearly 25% cut, this is going straight to the advisors pocket as commission. My friend just went from 0% commission to 25% commission.

(That’s the first three years. After that it’s 3% a year, still higher than mutual funds!)

And it’s not easy, as you can see, to calculate what one would really pay. Get to a basic sum assured, find your “band”, divide and multiply and do second level calculus and jump though three fire hoops before getting to the actual charge. (I exaggerate, but you get the point) For anyone with only a fleeting interest in finance, this policy can be easily missold. And it’s likely even advisors don’t understand this enough – but I believe they act to get the max commission in most cases. Either ways, the policy details are obfuscated, and likely deliberately, just to avoid customers instantly realizing the “obscene” commissions that such ULIPs charge. This is sophisticated highway robbery, with a smile.

Death to all ULIPs. Please do not buy them. If you have them, find the right time, and ditch them. Buy a term plan only.

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