Policyholders of unit-linked life insurance products pay an
agreed sum for the unit-linked insurance to the insurance company,
as a regular premium, or in one lump sum. These payments cover the
life insurance component as well as the investment, administrative
costs, contracting fee and the commissions. The "total cost
charged" ("TCC") is an indicator
– calculated in line with the rules of Hungarian insurance
regulations – showing all costs charged on life insurance
policies having a savings element, reflected as a percentage value.
The regulation of the TCC in Hungary has been amended effective 1
Up until now, insurance companies could charge most fees in the
early years of the lifespan of an insurance policy. Therefore, an
insurance company had little interest in maintaining an insurance
policy, since they had already profited significantly during the
first years. The latest amendment to the Hungarian insurance act
sets a limit to the minimum amount which can be charged on the
insurance premium, to be utilised for investment during the initial
years of the policy. This percentage is a minimum 20% of the
insurance premium (minus risk element) for the first year, 50% for
the second, and 80% for the third year.
Due to the complexity and risks of unit-linked life insurance
policies, the Hungarian National Bank
("HNB") also introduced new rules to
increase the transparency of the cost elements of unit-linked life
insurance, and to restore the confidence of consumers in such
policies. In order to achieve this objective, the new provisions
set out rules and limitations for the TCC for unit-linked life
insurances, and the obligation to provide clear information to
consumers regarding the related costs and risks. The HNB intends to
limit the percentage of the TCC depending on the term of the
insurance policy in recommendation no. 8/2016 (VI.30.), effective
as of 1 January 2017 (the
"Recommendation"). The general
percentage of the limitation is 4.25% for insurance policies with a
lifespan of 10 years, 3.95% for a 15 year policy, and 3.5% for a
policy which expires after 20 years. If the insurance policy
contains a complex portfolio, a higher insurance risk, equity or
return guarantee, then the limitation may increase by 1.5%
respectively. The Recommendation also limits the percentage of the
TCC for insurance policies payed in one single sum at 3.5%. The
terms and conditions of the insurance policy will contain all costs
and fees that may be deducted in a quantitative way in order to
avoid hidden and unpredictable costs. The costs will also be
simplified and fixed without any unnecessary and confusing cost
The new rules are aimed at making unit-linked insurance products
more transparent, trustworthy, and thus more popular. The result
will, however, depend on the application of the new regulations in
the years to come.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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