The sum assured for ULIP products have been enhancedto 10x of the premium amount from the current 5x for individuals below 45 years and for those above 45 years, it has been increased to 7x. This will ensure that individuals get a fair amount of insurance coverage, the basic objective for which this product is bought from an insurance company.
ULIPs, an insurance cum investment product, has been hitting headlines because of the spat between IRDA and SEBI which has now been resolved, with the ordinance issued by the government, stating that the insurance regulator, IRDA would regulate the product. This is a victory for the insurance regulator that has, time and again been challenged on the regulation of ULIPs.
Fortunately for investors, it turned out to be a wakeup call to the insurance regulator, which has released the much awaited stiffer guidelines a week after the government ordinance on ULIPs were released. These guidelines will be effective from 1st September, 2010.
IRDA has touched upon various aspects such as tenure, coverage amount, and total charges for ULIPs and have also modified guidelines for pension products.
- Lock in period for ULIP products are to be increased to 5 years from 3 years. In doing so, IRDA aims at ensuring that consumers look at ULIP as a long term investment product rather than one which fetches gains in the short term.
- IRDA has also made it compulsory for all ULIPs excepting pension and annuity products to have either a mortality cover or a health cover. In doing so, IRDA is making sure that there is an insurance element embedded in the product rather than it being sold as a pure play investment product.
- The sum assured for ULIP products have been enhancedto 10x of the premium amount from the current 5x for individuals below 45 years and for those above 45 years, it has been increased to 7x. This will ensure that individuals get a fair amount of insurance coverage, the basic objective for which this product is bought from an insurance company. If only meeting investment needs were the objective for customers, then they might as well have gone in for a mutual fund product whose primary objective is to manage money.
- Top-up premium will be considered as single premium. This will necessitate additional insurance cover which is to the advantage of the investor.
- Surrender Charges have been modified to suit investors who ended up paying surrender charges as high as 100% if the policy was given up in the first year. Discontinuation charge is the terminology used by IRDA for surrender charges and IRDA specifies that these charges should aim at recovering the cost incurred by the insurance company in acquiring the customer. They money after the deduction will be returned only after the lock in period, which has been changed to 5 years. The guideline on this charge is as under
- Lower of 20x annual premium of the value of the fund up to a maximum amount of Rs. 3,000 for premium below Rs 25,000
- Lower of 6x annual premium of the value of the fund up to a maximum amount of Rs. 6,000 for premium above Rs 25,000
Customers stand to benefit in case they opt for surrender as a large amount of their corpus will be returned.
- Front loading of charges has been a practice in case of ULIPs. IRDA aims at distributing it over the lock in period so that distributors/agents will not push these products only to obtain higher commission. The difference in yield has been capped from the fifth year onwards. This will bring down overall charges on the product and will also smoothen the charge structure for the policy holder.
- Pension or annuity products should provide a minimum guaranteed return of 4.5% p.a. or as specified by IRDA from time to time, on the maturity date. While IRDA’s objective is to protect the hard earned money of individuals, this change is unlikely to bring a cheer to the investor as IRDA is restricting the flexibility of fund managers by forcing them to invest a substantial sum in debt to fetch the minimum returns. Given that pension is a long term product, investment in equity could fetch investors a far better return as over longer periods of time, equities tend to do well.
- In case of discontinuation of the policy, a lump sum of a maximum of one-third of the accumulated value can be withdrawn and the balance will have to be used to purchase an annuity product. This restriction on withdrawal works well for investors as it is aimed at fulfilling the financial needs of individuals during the retirement period.
This move by IRDA is a step in the direction of making ULIPs a more transparent product with larger benefits to the investor community. All of the changes such as the increase in lock in period, cap on surrender charges and overall charges, increase in sum assured and conversion of pension products to annuity in case of discontinuation, works to the advantage of the investor. 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. That aside, the other changes made by the insurance regulator, has bought in cheer to the investor community.