Complex Insurance Policies to be taken off

Not sure how many of you have missed an important news item yesterday.

The IRDA or Insurance Regulatory Authority, which sets the standards and protocols for the insurance companies to operate and sell the insurance policies, has issued a notice to some insurance companies regarding their policies.

The notice is issued for taking off the policies from the markets which are very complex in nature, especially in terms of the way they charge commission. The problem identified by IRDA is with regard to the insurance policies having highly complex commission structure. “Better Late than Never” – atleast IRDA woke up to take some action against the freely flowing insurance markets, which appeared to be completely insane and out of control.

The two worst hit insurance companies are Allianz Bajaj (with its Super Agent) and Aviva (offering UNCERTAIN “Kal Par Control” – by deducting CERTAIN heavy charges today itself). These are the 2 companies which have highly complex commission charges structure for their insurance policies.

Readers are advised to go through the COMMENTS SECTION of my previous article Insurance v/s Investment v/s Tax savings – agent based business . There, Shashi had asked me about explaining the commission structure of the UnitGainPlus Single Premium Policy from Allianz. Here is how the policy was charging commission and administration fee to the investors:

You invest 2 Lakh in this policy. The policy mentions that 98% of your money will be invested while ONLY 2% will be the charges. This gives the impression that 98you’re your money will be invested. But the truth is that first, 98% of your money will be invested, so you would be given Policy Units worth 98% of your money. From these units, they will deduct further charges, by canceling the units from your account. Here is what the policy mentions:

-Policy Administration Charge: Rs 600 per annum deductible monthly through cancellation of units, inflating at the rate of 5% per annum.
What this means? Though your invested amount will be 98% of 2 Lakhs, they will recover the admin charges by first investing your 98%, and then immediately canceling some of the units equivalent to 600 Rs. per annum. Moreover, this charge will keep on increasing at 5%, meaning, each year the admin charge will keep growing at 5%. Another problem is that the charges are deducted each month. This means that the compounded value of your investment will suffer severely.

-Fund Management Charge: The fund management charge would be levied on NAV and the rate is as follows: Equity Growth Fund 1.75% p.a., Equity Index Fund II 1.25% p.a., Liquid Fund 0.95 % p.a., and Bond Fund 0.95% p.a.
Now what's the point in paying 1.75% charges each year in the name of fund management? All charges again deducted by canceling the Units.

This policy is doing nothing but making a fool of the investor (as other policies do too) by disguising the charges. First they say that 98% of the money is allocated and you get units worth 98%. Then they deduct their charges by cancelling the Units that too on a monthly basis. Smart People, Smart Way of Charging.

IRDA has woken up to these malpractices and disguised commission charges. Not only Allianz Bajaj policies, but also AVIVA policies will come under fire. IRDA has issued a notice to these insurance companies to withdraw these complex commission policies and replace them with more transparent policies within 15 days.

I would say IRDA has now started to do its real job – to regulate the insurance markets, commission charges and agents.

I would expect IRDA to further take disciplinary actions and instruct these companies to refund the charges that have taken so far on these insurance policies.

Most important and a better action would be to tighten the rules for selling the insurance policies – It would require defining strict guidelines for insurance agents who sell these policies without even they themselves understanding it. Best would be to have a certification exam from IRDA, only after qualifying the exam should a person be eligible to sell the policies. Presently, any person with a 12^th class qualification can become a LIC agent. When educated engineers, doctors, etc. in metro cities are not able to understand the policy terms and conditions, imagine how the situation would be in small towns where people are not that well versed with finance. Agents exploit them to a much larger extent. If the insurance companies are penalized for floating such complex policies, even the agents should be penalized for selling these – by a partial refund of their commissions to the policy holder.

I would like to follow up on this article from the people who have bought such policies. Maybe you’ll get a notification from your insurance company in a few days, mentioning the withdrawal or replacement of your existing policy. Please do let me know what is given to you – a new policy or a sum of money. I will be happy to analyze if things have improved or worsen or remained the same. Please post the details in the comments section.

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You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.