There is good news for investors looking at unit-linked insurance plans (Ulips). The Insurance Regulatory & Development Authority (Irda) is likely to put a ceiling on charges even during the middle of an Ulip policy term.
Till now, insurers are required to show the difference between net and gross yield at the time of selling an Ulip product in benefit illustration. But they are not required to comply with the cap during the term. If someone decides to withdraw from a policy in the middle of a term, the return depends on the way the fund behaves and is left at the discretion of the insurer. In January, Irda capped the difference between gross and net yield.
A senior Irda official said the difference between net and gross yield would be slightly moderate during a policy term. It would be around 3.25-3.5 per cent during five-10 year of a policy.
At present, for products with a maturity of 10 years, insurance companies maintain the difference between gross yields and net yields at 300 basis points. Similarly, for products with a tenure of over 10 years, the difference between gross and net yields cannot exceed 225 basis points. Within the overall cap, the fund management charges are capped at 1.25 per cent for all tenures.
He said insurers would be given another 15-20 days to comply with the new norms. They were earlier required to meet the new norms on Ulips, including pension products, by June 20.
With the proposed change, a policyholder will get a definite net yield during the middle of a policy term. For instance, if someone buys a 10-year policy and decides to surrender it in the sixth year, the yield depends on various expenses.
But after the new norms come into force, an insurer would necessarily have to maintain the given return on Ulips. There are various charges like policy administration, premium allocation, surrender, mortality and fund management levied on these investment-cum-insurance products.
Insurers increased the minimum term of policy after Irda capped overall charges in January. Irda also increased the minimum term of a policy to five years from three years earlier. On an average, most of the life policies have 10-15 years of term.
