Insurance Products offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time.
1) Premium Allocation Charge: This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.
2) Mortality Charges: These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc
3)Policy Administration Charges: These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.
4) Fund Management Fees: These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV).
Let’s explain how much amount will be invested per annum from the insurance premium paid by you. For ease of explanation we have taken the charges deducted by Birla Sun life Insurance – Dream Child Plan
Let’s say your age is 30, annual premium is Rs.50,000 & your premium paying term is 5 years. Here we will calculate the actual amount invested after deducting all the charges.
Premium Allocation Charges (PAC)
A premium allocation charge is levied on the Basic Premium.
7.50% of the Basic Premium received in the 1st policy year
6.50% of the Basic Premium received in the 2nd policy year
5.00% of the Basic Premium received from the 3rd year onwards
So in the 1st year out of Rs.50,000 invested, Rs.3,750 will be deducted towards Premium Allocation Charges .
These charges are deducted per month out of the premium paid by you. Say you are 30 years old & Insurance cover is of Rs.5,00,000, so you need to pay approx. Rs.1,000 per annum.
Note: Insurance cover depends on the number of factors such as age, sex, habits, profession, etc. You can buy an Online Term plan for almost half the rates.
Policy Admin Charges:
The policy administration charge is Rs. 20 per month for the first five policy years. It shall increase to Rs. 25 per month in the sixth year and inflate at 5% p.a. thereafter. This charge is levied monthly by cancelling units from the investment fund at that time.
So in the 1st year, you need to pay 20*12 = Rs.240 in the name of policy admin charges & in the coming years, these charges are going to increase.
Fund Management Fees:
The daily unit price of the investment fund is adjusted to reflect the fund management charge of 1.25% p.a.
So in the 1st year, you need to pay approx 1.25% of the premium paid in the name of FMC.
FMC = (50,000 – 3750 – 1000 – 240)*1.25% = Rs.562
Catch: FMC is paid on the net asset & not on the premium paid. So in the second year, FMC will be on second year premium + value of assets at the end of 1st year & so on.
Total Charges deducted out of the premium paid:
|Premium Allocation Charges||
|Policy Admin Charges||
|Fund Management Charges||
So out of Rs.50,000 invested by you, Rs.44,448 is invested.
Note: Service tax @12.36% is not included by me for the ease of calculation.
People generally feel or are told by agents that these charges will decrease over the period of time, IT’S A MYTH. Though premium allocation charges decreases with time but FMC increases each year.
Though Insurance regulator has curbed down the charges on these insurance + investment products, still one need to pay about 10-15% each year as charges. My point is why to pay these charges when you can make a customized investment plan on your own with almost zero charges & hundred percent capital protection.
Have a look at these handy calculators with the help of which you can make a customized policy for yourself: CLICK