www.kgandhi.anindia.

com

Buying ULIPs Attractive after the Introduction of

New Fee Cap

We have written a series of article on ULIPs by pointing out the major

advantages and disadvantages of ULIPs. We had also come up with articles
on comparison of Mutual Funds & ULIPs and comparison of Fixed Deposits &
ULIPs. We have received both positive and negative comments on these
articles. Our intention is very simple; people should understand the
importance of Insurance. It is not just an investment but it is a tool to cover
the risk of your life. It helps your dependants to continue their life with same
standard of living even in your absence. Now IRDA (Insurance Regulatory &
Development Authority) has imposed a cap (maximum limit) on the charges
that insurers levy on customers. In this article we will give you a brief about
the effect of this move on your investment.

ULIPs will Turn Attractive on New Fee Cap

Unit-linked insurance plans (ULIPs) are one of the hot products of life
insurers at the same time people had a complaint that Charges are very high
in ULIP. But now ULIPs could turn more attractive with the regulator,
Insurance Regulatory and Development Authority (IRDA), imposing a cap on
the charges that insurers impose on customers. The regulator’s move comes
in support of complaints that ULIP charges are higher compared to mutual
funds. ULIPs are now expected to become more competitive than mutual
fund products.

Important Points to Note

ULIP return may rise by 150 bps (1.50%)

300 bps (3%) is the cap on ULIP charges for investments upto 10 years
225 bps (2.25%) is the cap on ULIP charges for investments more than 10
years
Currently ULIP is charging an average of 375 bps (3.75%) on all
Investments

The concept is very simple if a fund earns a yearly return of 15%, a

policyholder has to get in hand a minimum return of 12% for investments
upto 10 years.
 www.kgandhi.anindia.com

Fund Management Charges

Currently, most of the mutual funds are charging 2.5% of the Fund value as
Fund Management Charges (FMC). But as per the announcement of IRDA the
fund management charges should not exceed 1.5% for insurance contracts of
over 10 years 1.25% more than 10 years. Understand one thing most of the
times insurance contract will be for more than 10 years. There is a difference
of 1.25% in Fund Management charges of ULIP and Mutual Fund. Below
given table will help you in understanding the charge structure in ULIPs and
Mutual Funds.

Years Mutual Funds Insurance (1.25%)

(2.5%)
1 500000 12500 6250
2 1000000 25000 12500
3 1500000 37500 18750
4 2000000 50000 25000
5 2500000 62500 31250
6 3000000 75000 37500
7 3500000 87500 43750
8 4000000 100000 50000
9 4500000 112500 56250
10 5000000 125000 62500
TOTAL Charges 6,87,500 3,43,750
Allocation charges are not included in this

Benefits of New Fee Cap

IRDA has announced a cap (maximum limit) on charges imposed on ULIPs. It

has strictly mentioned that the difference between the ‘gross yield’ and the
‘net yield’ of ULIPs should not exceed 3% for policies less than 10 years and
2.25% for policies more than 10 years. Out of these percentages, fund
management charges are limited to 1.5% for the shorter policies and 1.25%
for the longer policies.

For your understanding; Gross Yield is the fund’s total investment returns
and ‘Net Yield’ is what gets delivered to the policyholder.

This move by IRDA will help you to gain a minimum of 1.5% more return on
your investments because presently most of the insurance companies are
charging 3.75% on the Gross Yield of your investment. But as per the new
standard brought by IRDA the charges cannot exceed a maximum of 2.25%
 www.kgandhi.anindia.com

(for investments more than 10 years). You might feel that the difference of
1.5% doesn’t make much difference in your return but the fact is different.

Example:

Below given table will help you to understand the effect of charges on your
return.

Assumptions

Following are the assumptions of this example;

Yearly Contribution – Rs.1,00,000
Return on Investments – 14%
Allocation Charges:
1st Year – 10%
2nd Year Onwards – 2%
Policy Term – 20 Years
Premium Payment Term – 15 Years

Returns as per Previous Charges (3.75%)

 www.kgandhi.anindia.com

Returns as per IRDA Recommended Charges (2.25%)

 www.kgandhi.anindia.com

Difference in Returns

Returns At 3.75% (Rs) At 2.25% (Rs) Difference

After 5 years 6,40,175.97 6,72,277.06 32,101.10
After 10 years 16,71,086.25 18,41,221.63 1,70,135.38
After 15 years 33,10,727.43 39,49,861.14 6,39,133.71
After 20 years 52,65,642.56 66,15,354.96 13,49,712.40
TOTAL 1,08,87,632.2 1,30,78,714.79 21,91,082.59

As a result of New Charge Cap, over a period of 20 years your total returns
will be Rs. 21,91,082.59 more than the present returns. It means, the profit
of insurance companies will reduce and the returns of investors will increase.
Presently a major part of your returns are eaten by insurance companies. But
after the introduction of New Charge Cap they won’t be able to take much
out of your investments. As a result your returns will increase.
 www.kgandhi.anindia.com

Loop Holes in New announcement

Presently there are plans with different allocation charges; it ranges

between 2% - 60%. Most of the times investors will be cheated by
insurance advisors, they always suggest you the worst plan with
maximum allocation charges because agent commission will be more
in such plans. So think twice before choosing a plan.

How www.kgandhi.anindia.com can Help You

We are not insurance advisors and we are not working on

commission basis. Our intention is to make all Indians financially
literate. There are 1000s of financial products in Insurance, Mutual
Fund, Banks, etc. choosing the best one among these is very difficult
job. As we have mentioned earlier, most of the sales people will
stress on the worst product as it offers more commission for them,
but we offer you the best financial solution for all your financial
problems as we only advise.

For our last article on ULIPs we got so many comments by indicating

that we are acting as an insurance agent and there are no ULIPs with
10% allocation charges. We are repeating again there are ULIPs with
2% allocation charges. Like the same there are ULIPs that has
generated 16% returns and minus returns also. Choosing the best
one is your responsibility. If you don’t know about this, it is only
because of your financial illiteracy. We will guide you with valuable
suggestions and advices related to any of your financial queries. Only
thing you have to do is login to www.kgandhi.anindia.com

Ask your query anything related to any Investment or any kind of Insurance of
any company Just visit our website www.kgandhi.anindia.com and get the best
comparison and solution and enjoy the tomorrow hassle free and paper free.

Advice on:

Inter Corporate Deposits,Special Economic Zone ( S.E.Z. )_Solution

 www.kgandhi.anindia.com

Insurance: Corporate Group Insurance, Children Future Planning, Term

Plan, Home Loan Insurance,Health, Whole life, Pension Plan,Money Back,
Maternity, Tax Planning, Personal Accident, critical Care, Travel,Burglary &
Theft, House hold insurance, office insurance, Shopkeepars insurance, utensil
insurance, Car insurance, Commercial vehicle, etc….

Investment: ULIP Plans, Systematic Investment Plan, Mutual Funds. Post

Office Scheme, Govt. of India Bonds, Fixed Deposits etc……

For Further Details kindly Contect :

Thanks and Regards,

Kirang Gandhi
Corporate Financial Planner
www.kgandhi.anindia.com
M-9271267305