Road to revival for Ulips

Discontinued plans could face caveats, higher premium from companies.

Come November and you can revive your discontinued unit-linked insurance plans (Ulips). The Insurance Regulatory and Development Authority (Irda) last week mandated insurers to allow policyholders to revive Ulips within two years of the last premium paid, but not after the lock-in period expired.

So, if you paid the premium only for a year after buying a Ulip, you can revive the policy in the next two years. If you stopped paying the premium in the fourth year, you will have only a year to revive it as the five-year lock-in period ends after that.

Earlier, policyholders had to revive their policies within the stipulated grace period of 30-45 days, or the policy lapsed. The insurer deducted a surrender charge of around six per cent in the first year and then moved the money into a separate discontinuance fund that consisted of the fund value of all discontinued policies with the income earned on those. And, policyholders were paid once the lock-in period (now five years) ended.
 

KEY POINTS TO KNOW

• Ulips can be revived within two years from discontinuance, but before the lock-in period expires
• On revival, insurers have to refund the discontinuance charges
• Policyholder gets the fund value, income earned and a minimum guaranteed 4 per cent return
• Fund management fee cannot exceed 50 basis points a year and is non-refundable
• Do not discontinue policies that are goal-linked, revive in case of an emergency
• For reviving Ulips, insurers may attach internal conditions or raise the premium

Though these norms have been in place since September 2010, this circular clears the air on the charges levied for managing the discontinuance fund.

Earlier, on discontinuing, the policyholder had to pay the surrender and fund management fees. But now, insurers can only levy a fund management charge not exceeding 50 basis points a year on a discontinued policy, that too after ensuring the guaranteed return (of four per cent). "This will not be returned if you revive the policy, but the surrender fee will be refunded," says Suresh Agarwal, EVP and head (distribution and strategic initiatives), Kotak Life Insurance.

The insurer shall add back the discontinuance charges deducted from the fund to the fund value and allot units of the segregated fund on the date of revival. You shall also get a minimum guaranteed interest on par with the State Bank of India's savings bank account rates on the accumulated amount, with the income earned minus the fund management charges, says Irda. Savings bank accounts earn four per cent interest.

Before September 2010, Ulips were missold on the premise that premiums needed to be paid only for the first three years, which was the lock-in then. So, many who opted for costly Ulips, charging between 20 per cent and 60 per cent premium, discontinued it mid-way.

Certified Financial Planner Suresh Sadagopan says: "It will work in your favour only if the policy is retained for a long period. Returns from Ulips can then be comparable to, or, in some cases, even better than with mutual funds."

Customers are cautioned to discontinue policies only if those are not linked to any goal or in case of an emergency. "Ulips invest in equity funds but, if discontinued, the money is moved to debt fund, where the growth is limited to 4-5 per cent," adds Agarwal.

In spite of these guidelines, insurers could attach conditions or increase paperwork at the time of revival. Reviving policies within six months of paying the last premium is easy. Those reviving after that are likely to be asked for a declaration of good health by the insurer, especially if the sum assured is large.

"Though underwriting norms differ, when the cover is very large, or the age of the policyholder is high, the insurer may ask for a medical test on revival. Customers should be aware of the revival requirements of their insurer, before they discontinue a policy," an insurer says. The reason: The insurer may fear that a medical emergency or the risk of death has led to policy revival. And, this may even lead to an increase in premiums, even to as much as that a new policyholder has to pay.

Premiums could also be increased if you have moved to a different premium slab. Premiums depend on which age slab you fall in. For instance, premiums are similar for those in the 25-35 age group. If you were within that age bracket when the policy was discontinued, but have now moved out of it, your premium could be increased, say industry experts.