After unit-linked insurance plans, the Insurance Regulatory and Development Authority (Irda) has introduced stringent guidelines for universal life policies (ULPs).
The guidelines, issued late Tuesday, will classify all ULPs as variable insurance products (VIPs). Consequently, all VIPs will only be offered under non unit-linked platform, implying that they will now come under traditional plans.
The guidelines stipulated that VIPs should provide only mortality cover and no other contingency. The policy should be for a minimum of five years. The sum assured should be at least ten times that of the annualised premium.
On death, a benefit equal to the guaranteed sum assured plus the balance in the policy account will be provided. On maturity, a benefit equal to the balance in the policy account together with a terminal bonus, if any, will be paid to the policyholder.
According to the new guidelines, the minimum policy and premium payment term shall be five years and all VIPs shall have a lock-in period of three years. Every policy shall have a corresponding policy account whose balance shall depict the accrual to the policyholder.
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The lock-in period of ULPs (now VIPs) will be three years. Though one can surrender in the first, second and third years, the surrender value will only be paid after the third year. In this situation, the balance in the account will be frozen. Also, no interest will be paid on the balance neither will any expense be charged.
In the fourth and fifth years, the policyholder will be eligible for 98 per cent of the policy balance and the amount will be paid immediately.
VIPs, henceforth, can only be regular premium products. Single or limited premium will not be allowed. Even group insurance contracts will be allowed, at present.
The insurance regulator has also capped maximum expenses, including commission. In the first year, the charges have been capped at 27.5 per cent of the first premium, 7.5 per cent in the second and third years, and 5 per cent from fourth year onwards. In case of top-up premiums, expenses have been capped at 3 per cent.
Said a product head of an insurance company, “We have to work out the profitability of these products after the new norms. Normally, insurers charge 20-25 per cent commission in the first year. There is an expense over and above this.”
Insurers have to provide a policy account statement to holders every year giving details of opening and closing balance. This statement will also give a complete break-up of premium received, deduction towards mortality, commission and expenses, floor interest earned and bonus, among others.
“Earlier, policyholders were only made aware of the sum assured. They did not know about the commission or expenses. Now, they will be made aware of this through the declaration form,” added Kannan.
This apart, the policyholder should be offered the flexibility of changing the sum assured during the currency of the contract subject to a minimum sum assured as approved in the file and use (F&U) clearance accorded by the authority.
There should not be any rider attached to the product. No partial withdrawal would be allowed. However, a loan amount of not more than 60 per cent of the balance could be extended. The product should have guaranteed a minimum floor rate for the whole term that should be declared at the start of the policy.
On October 22, Irda had suspended the sales of ULPs till new guidelines were to be issued.