The Insurance Regulatory and Development Authority of India (Irda) has tried to address the major issue in case of Ulips –
- High commissions paid to agents to sell ulips – declaring the amount upfront only will not help (why is discussed below)
- The way in which Insurers motivate agents to increase Ulips sale
First of all Ulip is short for unit-linked insurance plan are market linked investment products offered by Insurance companies which provide insurance as well. There is a controversy surrounding it because the Securities and Exchange Board of India (Sebi) and Irda are at loggerheads as to who will have the regulatory rights regarding Ulips (since it has both the investment and insurance component). The issue has escalated to such an extent that it has reached Court of Law. Even the government could not resolve the matter amicably.
The Irda’s attempt is to improve transparency and help the regulator in its face-off with stock market and mutual fund regulator, Sebi.
Irda has tried to justify the high commissions paid on Ulip by Insurers. On 27th April’10 it asked Insurance companies to declare commissions/brokerage payable to an agent/broker upfront at the time of selling an Ulip with effect from 1st July’10. Thus commission will now be a part of the benefit illustration issued to prospective policyholder at time of sale of Ulip.
The illustration will include several details:
- The premium paid and the charges (like the premium allocation charge, policy administration charge, fund management charge, mortality charge, etc) made against that premium paid.
- The amount of money the policyholder is expected to make at the end of the tenure of his policy after adjusting for these charges and assuming rates of returns of 6% and 10% on the portion of the premium invested.
- Signature from the policyholder stating that he has understood the policy that he is taking on.
The Irda had issued a circular on the “benefit illustration” on 25th January’08 which made it compulsory for insurance companies to take the signature of the policyholder on the benefit illustration stating that he (the policyholder) has understood the policy, before taking the policy. Following this it was revealed that how agents would sign this benefit illustration document themselves, without explaining the Ulip to the prospective policyholder or get the signature with all the documents that the policyholder needs to sign at the time of taking the policy. In short the purpose for circular was totally wasted.
Also the point to note is intricacies of a policy are difficult to comprehend by many. In fact majority depend on trust and good faith on agents to get insured. There are times when the agent too fails to understand the complexities of the policy. Then if agents are unfair in their sale process due to mind for an extra buck in form of incentives or commission can be very harmful for the investor.
(Rest assured we at www.bimadeals.com make it simple for you to understand and then make a choice so that you are not left in the dark.)
Suggestions:
As long as insurance companies offer a commission of up to 40% of the first year’s premium on an Ulip to insurance agents, mis-selling will continue. Agents would most likely continue to get policyholders to switch to new policies, so that they can continue to make high commissions.
It also has to be noted that any seller would never like to disclose his/her exact profit; that too on each item. Same applies to an insurance product as well.
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