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What are the New Reforms in a Unit Linked Insurance Plan?

After the fight between Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA) regarding Unit Linked Insurance Policy (ULIP) the Supreme Court of India have decided that investments in ULIP which were covered under Section 80C of Income Tax act were to be placed under the governance of the IRDA.

Unit Linked Insurance Policy (ULIP) is a product which can provide you life insurance coverage and also at the same time investment options like a mutual fund. A portion of the amount (premium) paid would be contributed for the amount promised under insurance policy and the rest would be placed in the investment avenue preferred by you. It could be equity or fixed return or a mixture of both.

SEBI tried to take over this 10-lakh-crore industry because ULIPs shows the nature of an investment product. IRDA is the regulatory authority for Insurance so it doesn’t carry any authority to undertake an investment product. SEBI is the supreme authority to take care of investment products. After this fight IRDA has made some major changes in ULIP.

The ULIPs with new guidelines incorporated into them came into existence from 1st of September 2010. Following are the major changes made in ULIPs.

Lock-in period

The very important modification is the increase in lock-in period from 3 years to 5 years. This is simply applicable to each and every ULIP.

Charges

In case of ULIP with less than 10 Years term the total fees collected on premiums can not exceed 3%. It is defined as difference between net yield and gross yield should not exceed 3%. Out of which management fee can not be more than 1.5%. When it comes to ULIPs with more than 10 Years term the total fees collected on premiums can not exceed 2.25%. Out of which Fund management fee can not be more than 1.25%.

Residuary payments

Policies that are lapsed, surrendered or which are discontinued during this period will receive no residuary payments.

Additional Coverage

It has been made compulsory for all ULIPs to provide at least mortality cover or health cover except for pension and annuity products. It helps to make sure that there is an insurance element entrenched in the product rather than it being sold as a pure investment product.

Minimum Health cover

It is very clearly mentioned in IRDA circular that at any given time the annual health cover should not be less than 105% of the entire premiums paid.

Minimum Guaranteed return

Every ULIP pension or annuity product should give a minimum guaranteed return of 4.5 % per year or as mentioned by IRDA periodically on the date of maturation.

Loan option

The maximum amount that can be given as loan upon any ULIP should not exceed 40% of the net asset value.

Agent’s commission

There is a significant decrease in the commission of the agents

Top-up premiums

All top-up premiums made during the currency of contracts must have insurance cover, treating it as single premium.

Partial withdrawals

Partial withdrawal is allowed only after fifth policy year for all unit linked products except pension / annuity products.

Partial withdrawals in pension / annuity products

In the case of unit linked pension / annuity products, no partial withdrawal shall be allowed and the insurer shall convert the accumulated fund value into an annuity at maturity.

Surrender in pension / annuity products

In the case of surrender, only up to a maximum of one-third of the surrender value would be availed in lump sum and the remaining amount will be used to purchase an annuity.

Lock in for top up premium

Every top up premium will have a lock in period of three years from the date of payment of that top up premium. At the same time, top ups are not allowed during the last three years of the contract.

Minimum sum assured for individuals below 45 years

The minimum sum assured for ULIP products have been enhanced to 10x of the premium amount from 5x.

Minimum sum assured for individuals above 45 years

For individuals above 45 years, it has been increased to 7x of the premium.

Surrender Charges

Surrender Charges have been modified to benefit investors, earlier they had to pay surrender charges as high as 100% if the policy was given up in the first year. IRDA specifies that these charges should aim only at recovering the cost incurred by the insurance company in acquiring the customer. After the deduction remaining money will be returned only after the lock in period of 5 years. By making this reforms IRDA’s objective is to protect the hard earned money of individual investors, this change is unlikely to bring optimism in the investors as IRDA is restricting the flexibility of fund managers by forcing them to invest a substantial sum in debt to fetch the minimum returns. This move by IRDA is a step in the direction of making ULIPs a more transparent product with increased benefits to the investor community. All of the changes such as the increase in lock in period, increase in sum assured, cap on surrender charges and conversion of pension products to annuity in case of discontinuation, works to the benefit of the customer. The only area which investors would not be pleased with is the minimum guarantee of returns on the pension products. That could lower returns for investors given that pension is a long term product, investment in equity could fetch investors a far better return as over longer periods of time. Apart from this all other changes made by the insurance regulator has bought in cheer to the investor community.

The reforms in a Ulip have helped save Ulips and the insurance sector in general from total chaos. This is seen as a step in the right direction. These reforms have come just in time. The twin benefits (insurance + investment) plans see light at the end of the tunnel.

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