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New ULIP Guidelines – Change in ULIP norms for all life insurance companies

There have been quite a few favourable changes that have been introduced in the selling of Unit Linked Insurance Plans. This lists out all the changes in detail. [more]
ULIPs norms changed and changed for the better. From the 1st of September 2010 only plans which meet the new norms would be sold by insurance companies. And most of these norms are a remarkable improvement over the existing norms.
Let’s have a look at what is in store for us in the new guidelines:

1. Increase in insurance cover (both life and health)

Critics had been shouting foul that ULIPs hardly offer any insurance cover for the amount of money that was being invested, hence making them more of a investment tool rather than a hybrid product which offers a healthy mix of both insurance and investment. This has been changed to some extent.

New Guideline

All ULIPs now have an increased death cover (mortality) or health cover depending on the type of policy. The new minimum conditions are as follows:
 
For those who are below the age of 45 years when buying the policy:
Life Policies
For Single Premium policies – Sum assured should at least 125% the single premium
For Regular Premium policies – Sum assured should at least 10 times the annual premium
Health Policies
For Regular Premium policies – Sum assured should at least 5 times the annual premium or Rs. 1,00,000 whichever is higher
For those who are 45 years or older when buying the policy:
Life Policies
For Single Premium policies – Sum assured should at least 110% the single premium
For Regular Premium policies – Sum assured should at least 7 times the annual premium
Health Policies
For Regular Premium policies – Sum assured should at least 5 times the annual premium or Rs. 75,000 whichever is higher

Old Scenario

The mortality rates were half of the new regulations which were considered to be too low by a lot many.

MyInsuranceClub.com feels…

This is a great improvement to have in the ULIP category and makes it a better hybrid product with a good component of insurance to go along with the investment component.
 

2. Increase in lock-in period

What is lock-in period?

The lock-in period is the time frame during which you cannot exit the insurance policy due to any circumstances. So, as the names suggests, your money is locked in. This has been put in place to ensure that the policy holder stays with the insurance policy for a longer period of time as the benefits for most investment products need some time before they start making money. In short, it is to encourage use of ULIPs as a long term investment rather than as a short term investment tool.

New Guideline

The new guideline says that the lock-in period has been increased to 5 years. During this 5 year period no payments can be made to the customer on account of policy lapsation, surrender or discontinuation. Any payments which need to be made by the insurance company to the policy-holder on account of policy lapse, surrender or discontinuation would be made to the policy-holder only after the lock-in period of 5 years.

Old Scenario

Earlier the lock-in period was only for 3 years.

MyInsuranceClub.com feels…

This is a step in the correct direction as insurance should be as a tool for long term investment. There are other tools like mutual funds which are much more efficient for short term investments. Those wanting to invest for shorter periods should use mutual funds, direct equity or other ava ilable tools under the guidance of a trusted financial advisor. Even then it is advisable to stay invested for at least 3 years to make good returns. Good luck on that front! 
 

3. Charges

The handling of charges was the most controversial of all things related to ULIPs. They were considered to be extremely customer un-friendly and even gave rise to a lot of mis-selling by agents who used to get heavy investments to somehow get customers to buy the policy at the first go. Multiple steps have been taken to make this user friendly.

New Guideline

Overall charges have to be distributed evenly across the lock-in period
  • At maturity, the difference between the gross yield and the net yield shall not be more than 3% for policies with tenure less than 10 years
  • At maturity, the difference between the gross yield and the net yield shall not be more than 2.25% for policies with tenure of 10 years or more
  • Almost a year-wise band has been specified for the overall charges than cab be levied by the insurance companies. They are as follows:
  • Annual Premiums Paid Difference between Gross Yield and Net Yield

Annual Premiums Paid

Difference between Gross Yield and Net Yield

5 years

4.00%

6 years

3.75%

7 years

3.50%

8 years

3.30%

9 years

3.15%

10 years

3.00%

11 & 12 years

2.75%

13 & 14 years

2.50%

15+ years

2.25%

What are Gross and Net Yields?

Gross yield means the returns that you would get before deducting any charges and net yield is the returns the policy generates after the charges are deducted.

MyInsuranceClub.com feels…

These are by far the best part of the new guidelines. Earlier the charges were front-loaded i.e. a good part of your initial years premiums (in some cases even your entire first year premium!) were being allocated to charges and not being invested. As a result, if one exited early, or even after 5 to 7 years, they would rarely get back even the amount which they have invested. You would have been much better of leaving the money in your savings account or go in for the conventional fixed deposit which would have given you at least 5 to 7% returns per annum. Also there were a host of charges under different names which were being applied to your policy and only a fraction of your money was actually being invested.
 

4. Minimum Premium Paying Term

New Guideline

All ULIPs other than single premium products will have a minimum premium paying term of 5 years. In effect the policy-holder is expected to continue paying premiums for at least 5 years from the start of the policy. So all new ULIPs will now have a minimum term of 5 years. This of course does not hold true for single premium products.

Old Scenario

Earlier it used to be 3 years.

MyInsuranceClub.com feels…

This is in line with the usage of ULIPs as a long term investment tool. Historically it has been proven that a longer investment horizon increases the chance of better returns when invested in the markets. So go in for a ULIP, only if you have a minimum 5 year horizon – if possible till the end of the policy term. Chances are your returns would be better then.


5. Availing Loans against ULIPs

New Guideline

In case equity exceeds 60% of the total share of the policy’s funds, loan amount sanctioned will not exceed 40% of the net asset value.

And in case debt instruments exceed 60% of the total share of the policy’s funds, loan amount sanctioned will not exceed 50% of the net asset value.

Old Scenario

Loans were not allowed against ULIPs for a long time now

MyInsuranceClub.com feels…

Avoid loan against insurance policies of all kinds. Do it only as the LAST resort!
 

6. Top-Up Premiums

What are Top-Up premiums?
Any premium paid over and above the pre-decided annual premium is top-up premium. Those having surplus cash usually add that to their existing policy to avail the policy benefits.

New Guideline

All top-up premiums made during the policy term should have an insurance cover and would be treated as single premiums.

Old Scenario

The entire top-up amount used to go into the investment component and would not result in any increase in the amount of mortality cover that would be provided to the insured.

MyInsuranceClub.com feels…

This is also an excellent step and as we have been maintaining, it is aligned more towards making it a better hybrid product. Very often to see some benefits in the short term period we forget the importance of have a large insurance cover which is the entire purpose of having an insurance policy.
 

7. Changes specific to Pension Products

New Guideline

On maturity, all ULIP pension/annuity products will have to offer a guaranteed return of 4.5% per annum. This rate may be changed by IRDA though from time to time. This guaranteed return is for policies in which all premiums have been paid. Life and health cover can be extended to the policy as additional riders. Also, no partial withdrawal shall be allowed during the accumulations period

Old Scenario

No guaranteed returns were applicable and were completely subject to the fund performance alone.

MyInsuranceClub.com feels…

This rule makes it a rather attractive proposition for the policy-holder where he is not completely at the mercy of the markets. Even if the market performs poorly, he would be guaranteed a fixed rate of return. It doesn’t get better for the policy-holder.
But insurance companies might find this a tough pill to swallow and would be very careful before launching ULIP pension products because of this clause. So in the near term you might see very few ULIP pension offerings from insurance companies. Guaranteeing returns are not something most financial institutions are fond of doing!
 

8. The sad part

These changed regulations apply only to policies sold after 1st September 2010!

Deepak Yohannan
Deepak Yohannan is the CEO of MyInsuranceClub. He enjoys writing on Personal Finance and contributes regularly on sites like Reuters & Moneycontrol. He is a strong proponent of online insurance and is often found pointlessly babbling about it!

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