Guarantee returns for pension plans, cut front-loading of costs, increase risk cover.
The Insurance Regulatory and Development Authority (Irda) today introduced sweeping changes in the structure of unit-linked insurance plans (Ulips).
Effective September 1,Ulips will offer a minimum guaranteed annual return of 4.5 per cent on pension plans, a 10-times increase in the minimum risk cover, even distribution of charges across the increased five-year lock-in period and a ceiling on net and gross yields after that. Ulips will also come with a health or mortality cover.
The new guidelines come a week after the government issued an ordinance giving Irda full control over the Ulips.
| FACELIFT |
| * Lock-in period increased to 5 years |
| * Even distribution of charges |
| * Minimum premium-paying term of 5 years |
| * Rationalisation of cap on charges |
“Some of the major changes like lock-in period and compulsory annuitisation are quite good,’’ said Kamesh Goyal, country manager & CEO, Bajaj Allianz Life Insurance.
Front-loading of costs will be curtailed, as insurers will have to evenly divide the costs across the lock-in period, which has been increased from three to five years. During this period, no residuary payments on policies which have lapsed, been surrendered or discontinued will be made.
Any top-up premium will be treated as single premium for the purpose of insurance cover and be locked in for the same period.
At present, if one buys a Ulip where the annual premium is Rs 10,000 a year and the sum assured is 10 times, or Rs 1 lakh, the buyer has the option to purchase a top-up cover by paying an additional premium. If one pays, say, up to Rs 2,500 as a top-up, the person need not buy additional insurance and may instead use the funds for investment purposes. Over 25 per cent, or Rs 2,500 in this case, would be used to purchase an insurance cover.
But when the new norms kick in, insurance companies will have to mandatorily throw in a risk cover even in the initial 25 per cent top-up plans.
Front-loading of charges during the first year of a policy, a practice popular with insurers, will now come to an end. The regulator has mandated that overall charges be distributed in an even fashion during the lock-in. Caps on the difference from the fifth year (4 per cent) to the end of the policy term (3 per cent for a 10-year policy and 2.25 per cent for a 15-year policy) add to reduction in costs.
Insurers are not too happy with this particular move.
“The capping of expenses’ guidelines have been made very stringent. Small regular premium policies will become unviable; thus, a large proportion of people who were paying premium of less than Rs 15,000 or so a year will suffer. Second, the commission structure can’t sustain an agent’s income; the agency channel will suffer badly. I hope we don’t land in a situation where a product is very good but no one is willing to sell it,” added Goyal.
The minimum insurance cover has also been increased from five times to 10 times the annual premium of a regular policy or 125 per cent of a single premium policy for customers below 45 years of age.
For customers older than 45 years, the minimum cover has been increased to seven times the annual premium of a regular policy or 110 per cent that of a single premium policy.
Irda has also stipulated that the maximum loan amount that can be sanctioned under any Ulip will not exceed 40 per cent of the net asset value (NAV) in those products where equity accounts for more than 60 per cent of the total share, and 50 per cent of the NAV where debt instruments account for more than 60 per cent of the total share.
