BackDYK: Difference in exit loads of Ulips and traditional plans
In comparison with Ulips, costs of traditional plans continue to remain exorbitant
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There is a lot of noise on how insurance-cum-investment plans have improved and are now worthy of your money. The primary reason for this is that the new product design guidelines have decreased charges not only at the time of investment, but also on exits. But, this is mostly applicable for unit-linked insurance plans (Ulips). The charges in Ulips have been capped and the surrender charge or exit loads have been trimmed to a minimum. What you mostly see in the market these days are not Ulips, but traditional plans, where the costs are still high. Unlike Ulips, costs in traditional plans are not mentioned, but you can get a fair idea from the surrender charges.
Exit load structure of Ulips
Ulips now come with a lock-in of five years, which means you can’t liquidate your policy for the first five years. If you decide to discontinue during this period, the insurer will simply move your money to a discontinuance fund after levying an exit load. In insurance parlance this is also known as the discontinuance charge or surrender charge. If you withdraw in the first year and your annual premium is 25,000 or less, the maximum discontinuance charge that the insurer can levy is 3,000, and 6,000 if your annual premium is above 25,000. This charge reduces to 1,000 and 2,000 respectively by the fourth year and becomes zero thereafter.
The basic function of the discontinuance fund is to hold your money till the lock-in is over and also pay some interest. Currently, the Insurance Regulatory and Development Authority (Irda) has mandated a minimum return of 4% on this fund. The insurer can levy no other charge except a fund management charge not exceeding 50 basis points on the fund value per annum until the lock-in period is over. (One basis point is one-hundredth of a percentage point.)
Exit load structure of traditional insurance plans
Traditional plans don’t have a lock-in but surrender charges are steep during the initial years. Earlier, the insurer didn’t pay anything if you surrendered in the first three years; subsequently, too, it usually paid around 30% of all the premiums paid minus the first-year premium as guaranteed surrender value. But according to the new guidelines, if the premium paying term is 10 years or more, the insurer has to pay 30% of the total premiums in case of surrender after three years. So, the cost of surrender is 70% of your money and for the first three years you will continue to get no surrender value. If the premium paying term is less than 10 years, the guaranteed surrender value of 30% of the total premium paid will accrue after the second year. Between the fourth and the seventh year, it will be 50% of the premium paid. After the seventh year, the insurer has to file a surrender charge and get it cleared by Irda. For a single-premium policy, surrender value will be 70% of all premiums paid if you surrender in the first three years, and 90% if you surrender in the fourth. After this, the insurer has to file a surrender charge and get it cleared from Irda.
The new product guidelines have brought down the exit load in traditional plans, but in comparison with Ulips and most other financial products, they continue to remain exorbitant.
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