A little known fact that’s is likely to be suppressed in the sales pitch of agents pushing unit- linked insurance plans (Ulips) is that a large part of a client’s first- year premium is usually a dead loss to him.

Insurance companies appropriate the money under various charges, usually amounting to 50 to 60 per cent of the first premium. Only the balance is invested in the capital market. Very few Ulip holders are aware of this at the time of handing in their cheques.

In some cases, not a paisa of the premium is invested; the entire money is gobbled up by the insurance company. This is revealed in a scrutiny that Financial Chronicle made of Ulip plans of the big insurers in this business.

As FC found out, the ground reality: the charges are much higher than any other comparable investment product. What is deducted from the first premium for a Ulip is as follows: An allocation charge, which includes initial and renewal costs and agent commission (35 per cent of the premium); a policy administration charge (generally fixed and levied throughout the tenure of the plan); a mortality charge; stamp duty; service tax and a fund management charge (paid every year and charged as a percentage of the fund).

This corroborates claims of financial planners that Ulip is not the best investment product. They hold that money is best put separately in term insurance and pure investment avenues such as mutual funds, bank deposits and public provident fund.

Naturally, insurers – 70 to 80 per cent of whose business, even in the worst market conditions, comes from Ulips — do not agree. They maintain that Ulip is a good and most transparent investment option, where the client is responsible for all investment decisions.
“In a Ulip, charges are mostly front-ended. Even though the first- year premium allocation charges may be high, they come down over a period of time. Most Ulips have no or low charges from the fifth year onwards,” Yash Mohan, senior vice-president at HDFC Standard Life Insurance, said. He claimed the fund management charge in a Ulip was lower than that of other investment products. “This helps the customer get better returns in the long term.”
Though most companies followed a front-ended charge policy (in other words, charges are deducted from the first premium), some others also levied a back-ended charge. In the latter case, the first- year allocation charge was not very high and the charges were spread across the entire tenure of the policy, Mohan said.

Another defence of the insurers is that the charges in Ulip are clearly mentioned in the policy document. But since the agent rarely, if ever, tells the client about them in the first place, the charges become a fait accompli as the premium has been already been paid and appropriated by the insurer. There is, however, a ‘re-look’ period of 15 days to return the policy, if the client is dissatisfied with the terms.

FC spoke to many Ulip investors, most of whom had no knowledge of the charge structure. One such investor, Rakesh (name changed), who had been pestered by an agent into buying a Ulip policy, realised many months later that none of the money in his first premium was going into the market. The entire amount was deducted as various charges which, he found out, included the agent fee, policy underwriting costs and the cost of ensuring guaranteed returns.
Other investors complained of having been misled by agents. “I had no idea that the entire premium would be deducted as charges. I was told that it was a mutual fund and I had to pay premium only for three years,” said Rakesh. In his case, the actual policy tenure was 15 years.The Insurance Regulatory and Development Authority (IRDA) has expressed concerns about high cost structure in Ulips and wants the charges standardised. “We will soon come out with a regulation to standardise charges for all Ulips. We have all also made our stand on mis-selling clear. People should come forward and lodge complaints in such cases,” said a senior IRDA official.

Shyamal Saxena, chief distribution and marketing officer at Bharti AXA Life Insurance, said, “All Ulips are long term in nature. If you make a comparison of charges over the long term, the total charges in Ulips are lower and in line with similar investment products.”He insisted that the impact of the first- year charges over the long-term was not high. “The impact of fund management charges in other products is higher than the premium allocation charges over the long term.” “Further, since a Ulip is a long-term investment (10 years or longer), the agent needs to be adequately compensated for servicing the customer over this long period,” Saxena said. The allocation charge includes the agent’s commission.

However, Dhirendra Kumar, chief executive officer of mutual fund tracker Value Research, said the fee charged by mutual fund houses were far less than in Ulips. “Besides, the way Ulips have been devised, it is hard to figure out how much an investors is gaining or losing. In mutual funds, you know at the time of redemption if you are a loser or gainer.”