I have a complaint about the HDFC Unit Linked Pension Plan.
The Investment Content Ratio (ICR) is only 78% of the premium for the first two years. Thereafter it is 99%.
This means that only 78% of the premium paid is invested for the first two years. The remaining 22% goes to HDFC!
However Top Ups are allowed at any time and the Investment Content Ratio is 99% for Top Ups.
This means that a person can take a Policy paying a premium of Rs 10, 000 per year ( minimum ) and shortly afterwards top up by paying a large additional amount each year. His payments would have a much higher Investment Content Ratio.
On the other hand if a person takes out a policy paying a large premium every year he will lose a substantial amount for the first two years as the Investment Content Ratio for Regular premiums is lower for the first two years.
This is biased against persons who wish to take out policies with large premiums and offers an unfair advantage to persons who take out a policy with a smaller premium and top it up shortly thereafter.
I have written to HDFC Life and they admit that there is a disparity. They claim that the sum assured is higher for a large premium. However the sum assured for Unit Linked Pension Plans is only Rs 1000 regardless of the premium paid unless additional life cover is opted for.
I am adding a numerical example to make things clearer.
If X takes a policy with a premium of Rs 3 lacs per year he will lose Rs 66, 000 per year for the first 2 years which is a total of Rs 132, 000 for the first 2 years.
On the other hand if X takes out a policy with a premium of Rs 10, 000 per year and shortly after each premium tops it up by paying Rs 290, 000 he will lose
2200 x 2 = Rs 4400 + 2900 x 2 = Rs 5800 (Total of Rs 10, 200)
This means that by just juggling around and paying a small premium and a big top up X can save Rs 132, 000 - Rs 10, 200 which is Rs 121, 800
By paying a large premium of Rs 300, 000 per year X loses 121, 800 and gets nothing in return. This money goes to HDFC and probably for agents commissions etc. That’s why no agent will tell you about this. Agents always try to get you to take out a policy with a larger premium. Investors are being totally ripped off.
Review Modified on March 26, 2005
HDFC has made some changes in their ICR for the first two years since this review was first written. These are
For Premiums upto 1, 99, 000 the ICR for the first two years is still 78%
For Premiums from 2, 00, 000 to 4, 99, 000 the ICR has been increased to 83.5%
For Premiums from 5, 00, 000 to 9, 99, 000 the ICR has been increased to 87.5%
For Premiums above Rs 10, 00, 000 the ICR has been increased to 91.5%
The ICR for Top Ups in the first two years has been decreased to 97.5%
After the first two years the ICR is 99% for all categories.
This removes some of the disparities which I had talked about earlier.
However it is still much more profitable to take out a policy with a small regular premium and top it up shorty thereafter for the first two years rather than take out a policy with a large regular premium
One of the persons who read this review made a comment that HDFC Pension plan is relatively better than others who offer much lower ICR’s. I agree with this point. I would just like to highlight the fact that if you are taking out a pension plan, take out one with a small regular premium and top it up rather than pay a big regular premium - which is what your agent will tell you to do.