Insurance cos lower charges to woo consumers

CHENNAI: In a bid to woo customers and sell more policies, insurance companies have unleashed a slew of products that offer comparatively lower premium allocation charges.

Lower allocation charges benefit the customer as a larger part of his/her premium can be invested, which can lead to higher returns at maturity.

In case of some policies, when you pay Rs 100 as first year premium, around Rs 60 from it is deducted as premium allocation charges (to compensate distributors and sales infrastructure). Naturally, this left only Rs 40 (or 40%) as investible amount for the first year as 60% was the premium allocation charge.

Sample this: Kotak Mahindra Old Mutual Life Insurance's Flexi Plan carries first year premium allocation charges of 65% while HDFC Standard Life's Unit Linked Young Star Plus II policy has premium allocation charges of around 60%.

Insurance companies, especially the new ones, have been quick to spot this gap. So, Canara HSBC Oriental Bank of Commerce Life Insurance has launched its Unit Linked Whole Life Plan which has premium allocation charges of around 25% for minimum first year premium of Rs 25,000.

"We also have launched two unit-linked products, AEGON Religare Protect Gain Plan and AEGON Religare Star Child Plan where allocation charges are quite low depending on the premiums invested," Rajiv Jakhedkar, chief executive, AEGON Religare Life Insurance said.

While AEGON-Religare's Protect Gain Plan, with annual premium ranging between Rs 50,000 and Rs 99,999 charges 20% as allocation charge for first year, Bharti AXA Life Insurance's WealthConfident plan has allocation charge of 17% for annual premiums of Rs 1 lakh.

Another new entrant Future Generali's product Future Sanjeevani has first year's allocation charges of 10% for annualised premium of Rs 50,000 and over.

It's not that established life-insurers don't have low allocation charge products in their stable. While for most of Max New York's Unit Linked Plans, the first year allocation charges are in the range of 20 to 30% for regular and limited pay plans, for Single Premium plans it ranges from 4% to 5%.

"We have a product where this charge can go as low as 1% to 3% for high premium commitments and target segment for this product is High net worth individuals," Manik Nangia, Corporate vice president of Max New York Life said.

Higher allocation charges help save the capital for the insurers compared to low charges. This is true for India where expenses for both the life insurance company and the investor are front-loaded i.e. a big chunk of premium in the first year goes as charges towards writing off distribution costs.

"From the customers' side, low allocation charge means the insurer will be seeding the capital and might require a higher return," cautions T K Uthappa, director, ING Vysya Life Insurance.

Experts feel that it may be a little easy for the distributor to sell a product with low first year charge, but on the same hand if the overall returns are not impressive, the customer will not be happy.

"Ultimately, if unit-Linked policies are viewed with a long-term horizon of at least 15 to 20 years, it is bound to outperform other investments," feels Nangia of Max New York.

AEGON-Religare's Jakhedkar agrees. "A customer buying a unit-linked product must use it for long term savings requirement in addition to life insurance needs."