ULIPs set to get a makeover

Irda asks insurance companies to increase risk cover from July 1

BS 4/5/2010

The Insurance Regulatory and Development Authority (Irda) today tightened the norms for unit-linked insurance and pension plans, while increasing the risk cover they offer.

The move is being seen as an attempt to silence Irda’s critics, including the Securities and Exchange Board of India which has termed unit-linked insurance plans (Ulips) as investment schemes, since in some products the risk cover is limited to 2 per cent of the premium.

For starters, Irda has mandated that the policy term be at least five years. Earlier, policyholders could surrender their Ulips after three years.

Also, partial withdrawal, allowed after three years, would now be permitted only after the beginning of the fifth year, Irda said in a circular this evening.


What Sebi said?

# No life cover with pension plans

Irda’s new-look pension plans

# Life cover mandatory with pension plans
# No withdrawals allowed during policy term
# At maturity, only one-third of the maturity value can be withdrawn, the rest has to be used for purchasing annuities

What Sebi said?

# Only 2% of premium used to provide risk cover

What Irda has done on Ulips?

# Top-up premium paid to be used for purchase of risk cover
# Minimum term of five years mandated
# Partial withdrawal allowed after five years, instead of three now

In case of unit-linked pension plans and annuities, the regulator has banned partial withdrawal, which was so far allowed after three years.

From July 1, a pension plan purchased from a life insurer would be locked-in for a term decided by the buyer. Once the policy term ends, one-third of the maturity value could be withdrawn while the rest would be used to purchase an annuity.

“This restriction will give policyholders an advantage, as it will help them build a retirement corpus, but in case of (an) exigency, it (withdrawal) will not be allowed,” said G V Nageswara Rao, managing director and CEO, IDBI Fortis.

Besides, the regulator has made it mandatory for companies to bundle a life cover with a pension plan. Currently, life cover is optional with a pension plan.

The rules of purchasing annuity have been made similar to the product sold under the New Pension Scheme (NPS) regulated by the Pension Fund Regulatory and Development Authority. Commission is the only differentiator, as fund management charges under NPS have been fixed at 0.09 basis points (less than one-tenth of a basis point). There are other fees that have to be paid to the record keeper and a transaction fee for depositing funds (Rs 20 per transaction).

Apart from pension plans, the regulator also asked insurance companies to ensure all top-up premiums paid during the policy term must be used to provide a risk cover, too. This would mean top-up premium would provide up to 1.25 times insurance cover.

At present, if you purchase a Ulip where the annual premium is Rs 10,000 a year and the sum assured is 10 times or Rs 1 lakh, you have the option to purchase a top-up cover by paying additional premium. In case you pay up to Rs 2,500 for top-up, you need not buy additional insurance and instead may use the funds for investment purposes. Over 25 per cent, or Rs 2,500 in this case, 1.25 times of the additional amount would be used to purchase an insurance cover.

However from July, when the new norms kick in, even in the initial 25 per cent top-up plans, insurance companies have to mandatorily throw in a risk cover.

Also, the regulator has barred companies from allowing top-up plans during the last three years of the policy term.

“All these changes have been brought in to control the loopholes in the product. This is done to address the complaints against the product,” said the chief executive of a life insurance company.
As part of the changes, Irda has also tried to bring health products offered by life companies at par with those sold by non-life insurers. For this, Irda made death benefit optional. Non-life health insurers do not provide death benefits. So far, it was mandatory for life insurers to offer health cover with death benefit.

Last week, Irda had asked insurance companies to disclose the commission paid to the agents under Ulips. The high fees and commission, estimated at over 35 per cent for some policies in the first year, was an oft-repeated complaint against the plan.

In its order barring 14 life insurers from selling or renewing Ulips, Sebi had said that the pension plans sold by them were similar to some of the products sold by mutual fund companies. Irda had asked insurers to avoid the order. Now, the turf battle over regulating Ulips has reached Supreme Court which would hear the case in July.

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