In what would make unit-linked insurance plans (Ulips) more investor-friendly, the Insurance Regulatory and Development Authority (Irda) on Tuesday proposed to cap surrender charges and standardise the revival period for polices that had lapsed.
In the draft guidelines, the regulator suggested the surrender charge during the first year of the policy be fixed at 12.5 per cent of the premium paid in case the policy term is less than 10 years. For longer duration policies, surrender charges are proposed to be capped at 15 per cent. At present, insurers levy up to 60 per cent surrender charge in the first year, which drops to 30 per cent in the second year.
“It (the draft circular) provides the ceiling on surrender charges instead of leaving it to the discretion of the insurers,” Irda said.
In addition, the regulator, under pressure on regulation of Ulips, which are investment-cum-insurance plans, has proposed that the grace period for payment of premium be fixed at 30 days. For policies involving monthly premium payment, the grace period is expected to be fixed at 15 days. This is in line with other life insurance policies, though there are no fixed norms for Ulips at present. The reforms proposed on Tuesday are in line with the initiatives announced by Irda since April 9, when the Securities and Exchange Board of India (Sebi) asked 14 insurance companies to register with it or stop selling and renewing Ulips. The decision has since been kept in abeyance and the matter is now being heard in the Supreme Court.
Irda is also working on standardising the Ulip terms. It is expected to come out with the new norms in the next couple of months.
As part of the Ulip revamp, Irda has already increased the lock-in period from three years to five years. The draft norms issued on Tuesday said that for Ulips with a term of less than 10 years, there should be no surrender charges from the sixth year, and for policies with a term of over 10 years, the surrender charges are proposed to be removed from the seventh year.
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“This will bring more transparency in the product and policyholders will know how much they are paying for surrender,” said G N Agarwal, Chief Actuary at Future Generali Life Insurance.
On the issue of checking lapses, the regulator said a policyholder will have the option to revive a policy and continue only with the risk element of the cover.
Alternatively, the policy holder can continue to the extent of the risk cover and withdraw completely from the fund.
The regulator has asked all insurance companies to issue a notice to policy holders to exercise these options within 30 days of receipt of such notice. Also, if the policyholder does not renew his policy, he will continue in the fund with risk cover, and the risk charges and fund management charge will be recovered from the corpus.
At present, if a policy lapses, the fund goes to the shareholders account after the third year of the policy. A life insurance company has to maintain two accounts – policy holders' account and the shareholders' account. The surplus in the policy holders' account is paid as bonus to the policy holders, while the surplus in the shareholders' accounts is used to pay dividend to the shareholders.
But, going forward, Irda has proposed that in case a policyholder does not opt to be part of the fund, the fund value will be credited to “Lapsed Policy Fund” and the amount will be invested in a fixed income instrument, earning at least the saving deposit interest rate. The interest on the fund set aside will be allocated to the lapsed policy fund only and will not be available to the shareholders. This will ensure that shareholders do not profit from lapsed policies.
Last year, of the total policies sold, 10-15 per cent of the policies lapsed, as policy holders did not pay renewal premium. “The percentage of lapses had gone up substantially. To ensure that policy holders do not lose their money, we have standardised the terms of surrender,” said an Irda official.