Will ICICI Pru Life Platinum ULIP’s trail-based commissions curb mis-selling?

Trail-based commission, the standout feature in ICICI Pru Life's new Ulip - Platinum, could disincentivise mis-selling

Private life insurance major ICICI Prudential Life has introduced Platinum,  a first-of-its-kind unit-linked insurance policy (ULIP) with trail-based agent commissions linked to a customer’s fund value. This is akin to the commission structures that mutual funds offer.

ULIPs have often been compared with mutual funds as a large chunk of your premiums, less the protection cover cost (mortality charges) and other fees, is ploughed into investments in equities and debt.

The product's trail-based, assets-under-management-linked commission model is a shift away from the conventional insurance industry practice of paying front-loaded commissions linked to first-year premiums.

Until March 2023, regulations permitted insurers to pay up to 35 percent of first-year premiums to agents as commission, and incentives that could go up to 20 percent of commissions. Since then, insurers have been allowed to pay commissions as per their board-approved policies, as long as the overall costs do not exceed expense management caps.

ULIPs are meant to be long-term in nature, with a minimum lock-in period of five years and tenures often stretching to over 10 years. Yet, per the Insurance Regulatory and Development Authority of India (IRDAI) data, over 50 percent of policyholders exit their policies prematurely after the fifth year. The realisation that they are stuck with unsuitable policies that involve recurring premium payments is often the cause of such early exits.

Moreover, there is barely any incentive for agents to encourage customers to pay renewal premiums throughout the tenure, as an agent’s focus is on first-year commissions. Therefore, many get their customers to sell ULIPs purchased earlier and switch to newer ones , promising better benefits, which constitutes a form of mis-selling.

“We wanted to design a product where the distributor’s interest is aligned with long-term customer interests and behaviour. Our new ULIP – the ICICI Prudential Life Platinum plan  comes with a structure where the distributor’s payout is linked to the customer’s fund value (assets under management — AUM), much like mutual funds. There is a regulatory push to get the insurance industry to think along these lines,” said Srinivas Balasubramanian, Chief of Products and Marketing, ICICI Prudential Life Insurance Company.

By surrendering or letting policies lapse before maturity, customers tend to lose out. “ULIPs by design come with a product structure where, in the case of early exit, the loss of potential earnings is significant. So, distributors should ideally nudge them to stay on, and trail-based commissions will incentivise that,” he adds.

Also read: How will IRDAI's latest proposal on agent commissions play out for policyholders?

While the customer AUM-linked trail-based commission structure aims to bring about a shift in distributor management, the charges applicable for policyholders will remain unchanged. “From the customer’s point of view, there will be no change in the charge structure. The tweak in the commission payout framework is relevant only for distributors,” clarified Balasubramanian.

The lesser scope for mis-selling is also good news for policyholders. “At times, agents encourage customers to surrender existing policies and buy new ones, because generally, the commission in the initial years is much higher than in subsequent years. As the commission is linked to the AUM in this policy, the agent will get a higher commission with the growth in the fund value / AUM. This will discourage churning and mis-selling,” explained Pankaj Mathpal, Founder, Optima Money Managers, an investment advisory firm.

Also read: Will mis-selling of insurance stop after consumer affairs ministry’s proposal? Unlikely, say experts

This ULIP comes with a choice four investment strategies and 21 funds spanning equity and debt, ranging from largecap, large-and-midcap, to balanced and debt funds.

Under its fixed portfolio strategy, it offers unlimited switches during the policy year; you will not have to pay any charges for moving your money from one fund to another. ULIPs hold an edge over mutual funds in this aspect, as switches are not treated as redemptions and do not attract any capital gains tax.

The minimum annual premium is Rs 1 lakh, while the minimum sum insured is Rs 10 lakh. The product offers two variants — Growth Plus and Protect Plus — where the premium paying term can range from 5-30 years. The tenure is linked to your age at the time of buying the policy. In the case of Growth Plus, the age at maturity cannot exceed 75 years, while the ceiling is 60 years under Protect Plus.

Also read: Will mis-selling of insurance stop after consumer affairs ministry’s proposal? Unlikely, say experts

The policyholder will get the fund value at maturity. This is not taxable as long as your annual premium does not exceed Rs 2.5 lakh a year. In the case of one’s death during the policy tenure, the claim amount paid out, again tax-free, will be linked to the plan variant chosen.

Under Growth Plus, the death benefit will be the higher of the sum assured, the fund value (including top-up fund value), and the minimum death benefit (that is, 105 percent of total premiums paid, including top-up premium). Protect Plus offers a death benefit that is the higher  of the sum assured plus fund value (including top-up) at the time of death, and the minimum death benefit.

Like several other ULIPs offered by ICICI Pru Life and other companies, this one too comes with zero premium allocation charges. Policy administration charges will amount to 0.25 percent of the annual premium (maximum Rs 500 per month), while the maximum fund management charges are 1.35 percent the fund value per annum.

Again, as with other ULIPs, there is a regulator-mandated lock-in of five years here too. If you happen to surrender your policy within five years, “The fund value, after deduction of discontinuance charges, will be moved to the discontinued policy fund (where the current guaranteed interest rate is 4 percent per annum),” Mathpal  explained. You will receive this amount post the lock-in period. “So, the poor liquidity and the low returns on the discontinued policy will be a major concern for policyholders,” he added.

Although partial withdrawals of up to 20 percent of the fund value in a year are allowed, this facility will be enabled only after the expiry of the five-year lock-in period.

Also, mortality charges for older individuals are higher as these are linked to age. Compared to younger individuals, less of their money will go towards actual investments, which is a dampener for those who have sufficient term cover and are looking at ULIPs only as a tax-efficient investment option.

Trail-based, AUM-linked commissions for agents could encourage ‘right-selling’ of this ULIP. It would be in the agents’ interests to explain the product structure, features, and charges in their entirety to customers, who would then, presumably, make an informed decision. This, in turn, would increase the likelihood of them staying put through the policy tenure to achieve their long-term goals. Put simply, it will reduce the scope for agents to resort to mis-selling by churning policies in order to earn higher first-year commissions.

The IRDAI-mandated five-year lock-in period. If you surrender the policy within five years, you will receive the fund value only after five years, though your funds will continue to earn nominal returns during the period. This makes ULIPs less liquid than mutual funds.