No more short term and cheap ULIPs

IRDA's decision to cap the ULIP charges to 3% from 2010 has already showing impact.SBI Life has increased the minimum policy premium from Rs 6,000 to Rs 12,000, Star Union Daiichi Life Insurance has increased it from Rs 12,000 to Rs 18,000 and also the minimum tenure has gone up to 10 years. Another company Aegon Religare has increased the minimum premium from Rs 12,000 to Rs 15,000, and has increased the term to 10 years from five years.Other private companies are likely to follow.

The move to lower charges was definitely to effect the term of the policy as IRDA has regulated charges in terms of YIELD (Gross return- net return at 10% should not be more than 3% for policies less than 10 years and 2.25% for more than 10 years). So the charges will remain more or less the same as commission needs to be payed from that and instead the term will be long term and bonuses will be more at the end of the term, and it will increase proportionately with the term of the policy; so that the yield cap is maintained.

Also the fund management charge(FMC) is capped at 1.35 per cent for products below 10 years and at 1.25 per cent for more than 10 years. So longer term means more FMC in terms of money payed. So more or less there is not going to make any major difference and instead the customer ends up locking his investment, which in turn is good for the customer himself, economy and the company. Some of the losses the company will make will be recovered by lending the money of the customer to long term projects of the economy.

The overall effect- More long term policies, less commission for short term policies, less small ticket policies, more money for the economy, but the effect in new policies sold needs to be seen. It may be less as customers always prefer short term unless the agent miss-sells long term policies as short term.