Understanding the jargon

Dipta Joshi / Mumbai August 3, 2010, 0:09 IST

Reading any statement whether of a bank, a mutual fund or a unit-linked insuranc

e plan (Ulip) can be a nightmare. Often, the jargon can stump a customer, Nitin
Desai discovered.
Desai s first Ulip statement showed that while he had invested Rs 50,000, only Rs
35,000 had been used to buy the units. On approaching the insurance agent, he le
arnt about the premium allocation charges (PAC), or the percentage that is paid
to the insurance agent for the first few years. In Desai s case, it was as high as
33 per cent of the first year premium. Meanwhile, the statement had a list of o
ther charges that he did not understand.

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In a Ulip statement, even a single-premium policy will show several transactions

during the full tenure, since the number of units is not fixed and charges are d
educted from the units. Switches further complicate matters as purchase price ca
lculations will change again, says Anil Rego, CEO, Right Horizons.
Most insurance companies follow different formats and use diverse terms in their
annual statements. A few sections, common to all, will be a summary of the poli
cy, a transaction report on the fund s growth and a section detailing the various
charges. All statements include basic information regarding the policy.
Transaction statement
The transaction activity report is an important section, as it traces month-on-mon
th activity in the fund. Other columns show monthly policy charges deducted from
the premium, the unit s price or net asset value (NAV), the number of units bough
t at that price and the fund value. The price per unit (NAV) is proportional to
the number of units held on the transaction date.
Monthly policy charges
This section gives an account of month-on-month charges. The columns describe tr
ansaction dates and the various charges levied. Some of them will be:
Mortality charge or life-risk charge: This is the cost to insure the policyholde
r. The charge depends on several factors like age, amount of coverage, state of
health, and so on. However, monthly mortality charges may vary, depending on the
number of units held on the transaction date.
Policy administrative charges: These are the charges for administering the plan.
This could be a flat charge throughout the term, or may vary at a pre-determine
d rate.
Tax duties, levies and total charges: They are the other charges.
If the policyholder takes such extra benefits as an extra health benefit (adding a
health policy to the existing policy), the option to switched funds or for part
ial withdrawals, charges applicable to these facilities will be mentioned in the
statement.
A Ulip statement should typically have these parameters. Besides the usual polic
y and fund name, client number, date of issuing the policy and date of birth of
the policyholder there will be some other critical information:
Premium: A regular mode means the premium is paid annually. A single premium ind
icates a one-time payment.
Sum assured: This is the risk cover for the policyholder, and is a function of t
he single premium in most cases.
Life assured: Of the policyholder. In case, the life assured is of a minor, the
name would be stated under proposer .
Contract status: In force suggests a continuing policy. Paid up contract means the p
remium is not being paid. If the policyholder stops paying the premium before th
e lock-in period has expired, it will read as lapsed.
Term and plan maturity date: This indicates the period and the exact date the co
ver ends.
Next due date: The date on which the next premium is due.