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The chief executive of a large private life insurance firm said the regulator wants them to give back minimum 90 per cent of all premiums paid when the policy reaches maturity. “For people above 50 years, the mortality charges are very high. Hence, we will not pitch this product to people above this age bracket,” he said.
Regulatory officials said since there have been cases of customers losing 40 per cent or more of their fund value in their Ulip product, there have been concerns about the depreciating fund value. While a minimum return of four per cent is to be guaranteed, policyholders have complained about not being returned the adequate fund maturity amount.
With the rise in misselling complaints, Irda had a re-look at the Ulip products, which had a lot of hidden costs. Hence, it came up with the September 2010 regulations for Ulips.
In these regulations, Irda capped the annualised charges of Ulips at 2.25 per cent for the first 10 years of holding. As there was no incentive for the distributors, Ulip sales saw a sharp drop. The average commission in Ulips as a percentage to premiums collected fell to four per cent in 2011-12, from nearly 10 per cent in 2009-10.
Insurance experts said that while overall charges in Ulips have come down since September 2010, other charges, including mortality charges and premium allocation charges, are high and could tough up to 35-40 per cent for the initial five years.
Companies are anticipating detailed guidelines on this front from the regulator. All Ulip products that have been filed with the regulator have been asked to comply with the 90 per cent return of all premiums. Further, companies have been told to not have fund switch options after a certain age limit so that returns are not affected.
For Ulips, charges including fund management charges (about 1.3 per cent), switching charges (to switch between funds), surrender charges, mortality charges and premium allocation charges (down to about 7.5 per cent compared to 20 per cent before September 2010) are charged for the policy. There are policy administration charges that range from Rs 70-120 that could be increased after four to five years.
“The 2013 regulations have made the product friendlier for policyholder. While the market conditions have been benign in this financial year, making Ulips attractive, if volatility enters the equity markets, it would be difficult to guarantee 90 per cent of all premiums to be returned,” said the appointed actuary at a mid-size private life insurance firm.
To increase the appeal of Ulips among agents, the Irda had linked the commission of the product to the tenure of the policy. In its linked insurance product guidelines in 2013, it had said the first year commission could go up to 35 per cent for a premium paying term of 12 years and above. For a five year premium paying term, commission would be 15 per cent in the first year.
A lock-in period of five years would be applicable from the inception of the policy. For protecting the interests of customers, discontinuance charges for policies have been capped at Rs 6,000 for policies with annualised premium of more than Rs 25,000 where the money is discontinued during the first year.
If it is discontinued during the second, third or fourth year, the charge cannot be more than Rs 5,000, Rs 4,000 or Rs 2,000, respectively. For policies with annual premium of up to Rs 25,000, the maximum discontinuance charges range from Rs 3,000, Rs 2,000, Rs 1,500 or Rs 1,000, depending on whether it was discontinued in the first, second, third or fourth year of the policy, respectively.
Irda has stated insurers should have one discontinued policy fund for all pension products, another for all life insurance products and a third for all health insurance products. In the case of Ulips, Irda has said that the discontinued policy fund will be a unit fund, with government securities and money market instruments as asset categories.
To ensure that policyholder returns are protected, Irda has said that the maximum reduction in yield would be four per cent (per annum) in fifth year and would go down to three per cent in the tenth year. It is 2.25 per cent from the fifteenth year.
The net reduction in yield at maturity for policies of up to 10 years will not be more than three per cent, while for policies of terms exceeding 10 years, it would not be more than 2.25 per cent.
