June 30, 2010 by akhilendra
New guidelines at place for ULIPs
The Insurance Regulatory and development authority of India had introduced new ULIPs guidelines to protect consumer interest and enhance ULIPs as Insurance products than investment products.
Starting from September 1,Insurers will offer a minimum guaranteed annual return of 4.5 per cent on pension plans (ULIPS), 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.
Commission payout has been restructured evenly 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.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, which is practiced by most of the insurers will come to an end. This been done specifically to reduce misspelling and control the cost of the ULIPs. 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.
Though insurers are not too happy with this particular move and feel that this move is too stringent for the market and will increase the minimum premium thereby reducing its affordability and also, may discourage distributers to sell insurance products.
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.
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