No Entry Load – No Agent Commission on ULIPs

High distributor commissions and upfront charges on insurance products appear to be the key areas of contention in the recent regulatory tussle between IRDA and SEBI. From media reports, the finance minister appears inclined towards a no-load model for all financial products over the long term.

We believe insurance companies will need to gradually reduce upfront distributor payouts or may even have to move close to a ‘no-load’ structure. High upfront charges and commission payouts as high as 15-30% of first year premiums on unit-linked products appears to be the most contentious issue in the SEBI-IRDA tussle on unit-linked products, especially in the backdrop of a no-load structure for mutual funds and new pension scheme (NPS).

The measures are in-line with Swarup committee report on minimum common standards for financial advisers and financial education proposed that all retail financial products (including insurance) would be on a no-load structure by April 2011.

Difference between Mutual Funds Vs ULIPs in Charges:
Policy allocation charges. This is akin to entry load and equal to 20-30% of the first year premium in most instances. This is largely passed on to the distributor as an origination commission. [Zero in Case of Mutual Funds]

Policy administration charges. This is a monthly/ annually maintenance charge on the policy primarily aimed to cover administration overheads. This is typically a fixed charge per month or linked to the premium payment. [Zero in Mutual Funds]

Fund management charge. Similar to fund management charges of mutual funds but these are capped at 1.35% of fund under management for insurance polices. Mutual funds do not have any policy allocation and administration charges, but fund
management charges are typically more than 2% for equity funds.