By Sunil Dhawan
The Insurance Regulatory and Development Authority of India (IRDAI) mandates all life insurance companies to provide a 'Benefit Illustration' (BI) to the prospective buyers of unit linked insurance plans (Ulips). The idea is to help the buyer take a look at how the premium would get invested, how and what charges would be deducted and most importantly, how the fund value will grow. It not only shows how much charges get deducted each year from the premium, but also how the investment will grow over the years. "Benefit Illustrations help visualize the returns, expenses and maturity/surrender value at various timelines and in various scenarios", says Varun Dua, CEO & Co-founder, Coverfox.com.
So, while buying Ulip, ask your insurance agent to generate a BI taking into consideration your age and other parameters, like premium and term of the plan. Here is how to read it:
In the BI, the underlying assumption of the gross investment return has been mandated by the regulator and currently stands at 4% and 8%. It will be shown separately running into several columns. Dua says, "The actual returns, however, can actually be lower or higher in reality, depending on the asset class chosen."
One portion of the BI will typically carry your name, age and other details, including premium, term, maturity age etc. The proportion of fund allocation will also be shown alongside.
The first column of the BI would ideally show the premium amount while the next column would reveal the 'premium allocation charge' (PAC) showing the amount deducted from the premium. The immediate next column shows the amount available for investment. Usually, Ulip provides 5-9 different fund options for investing with varying equity and debt exposure levels.
Similarly, there are other columns showing the amount of various other charges, including policy administration charge, fund management charge, mortality charge and service tax, that get deducted from the premium. In case of guaranteed Ulip, there's a column to show the amount that compulsorily gets added to the fund value. "They also help classify returns into guaranteed and variable which is helpful for customers." informs Dua.
The last three columns are important showing the fund value, surrender value and death benefit at the end of each year. If the BI is for a term of 20 years, the buyer can look at the fund value, surrender value and death benefit for any given year. Such a depiction of fund values at the end of each year helps the buyer in taking better and informed decisions, be it for children's financial needs or for any other life goal. Saroj Satapathy, CEO, Ideal Insurance Brokers, says, "Each buyer should carefully go through the Benefit Illustration and understand its implication before taking a judicious decision."
Related: ULIPS Demystified
The key yields
The effect of various charges is captured by the 'Net Yield' figure in the BI. It is shown separately for both 4% and 8% of assumed growth rate. So, at 8%, if the BI shows the Net Yield as 6.25%, it means the overall impact of charges is 1.75%, which is the reduction-in-yield (RIY). The various charges (RIY) eat into the gross return and reduce it to result in a lower Net Yield.
How to read the yield figure
The Net Yield or the RIY figure can be compared across Ulips for a better comparison. The higher the Ulip charges are, the bigger will be the RIY and the lower will be the Net Yield. An important thing to note is that insurers are allowed to keep the mortality charges out of calculation of the Net Yield. A few insurers, however, show both yields - one with morality charges and another without them.
Make sure that your agent prepares the BI on insurer's official software which would typically have a specific Version Number. It might also have a unique identification number besides the company's name, logo and registered office address. It should not be difficult to distinguish a fake illustration on an excel sheet from an original one. Cautions Sathpathy, "It is no secret that most of the mis-selling happens on this point alone." While discussing the BI with your agent, get a confirmation on the number of years for which you need to pay premiums to keep the policy alive.
See if the BI has been prepared based on the data provided by you especially for the term, sum assured and fund option. Adds Dua, "Customers should ensure that they go through the Benefit Illustration including assumptions and take clarifications from their financial advisor in case they have any question."
The transparency of Ulip is reflected in a BI. Each and every charge of Ulip and its quantum is shown. The various cash-flows at different stages are also shown. This helps one to take an informed decision by increasing, deceasing not only the premium amount but also the sum assured to meet a specific long-term goal. For future reference, insurers send a copy of the application form and the signed BI along with the policy document once the policy is issued. You should, therefore, make use of the transparency and flexibility in Ulip to your advantage in meeting your long-term financial goals.
Source: Economic Times
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