INVESTORS in unit-linked insurance plans, which are known as Ulips, will have some relief in the coming days, as new guidelines become effective for policies entering the market.
There are a lot of changes that will come into play and they will ensure that there is an added element to protect investor's interest. One such guideline refers to discontinued policies. Till now, investors often ended up paying a lot of charges on discontinuation of a policy before the completion of the policy term. This will now be restricted.
Here are some details with respect to discontinuation of unit-linked plans.
Applicability:
The first thing that has to be considered is the time period when the new guidelines related to discontinuation of Ulips will be applicable.
These guidelines say all policies cleared by the insurance regulator after this date will need to follow the stated directions.
Investors should first ensure whether the policy they are buying is covered by the new guidelines in order to benefit from the new norms.
Lock in and discontinuation: The primary factor that influences a number of investors is the lock-in for the policy. For a long time, there was a three-year min imum lock-in period for Ulips, which has now been raised to five years.
The important point is this five-year period also has a linkage to the discontinuation norm. After this period, no charge will be levied on the investor for discontinuing the policy.
Another important point is even if the policy is discontinued before the completion of the lock-in period, one will not get back the money till the five-year period is over.
Revival chances:
The benefit that the investor will get under the new guidelines is his ability to revive the policy even after the grace period for premium payment is over.
The grace period for the payment of premium is 15 days in case the premium payment is monthly, and 30 days if it is by any other frequency.
Once the grace period is over and the investor has not paid the premium, then the insurance company has to send a notice for revival of the policy within 15 days.
Within 30 days of the receipt of the notice, the investor can pay the premium and revive it.
This gives investors an additional opportunity to ensure that in case of genuine mistakes, they are able to continue with the policy.
If this option is not availed, then it will be considered as complete withdrawal from the policy without any life cover. This means the life cover will no longer continue, but the investor will get some amount after accounting for the charges and the time elapsed.
Liquidity:
If the investor feels that by discontinuing the policy any time she will get the amount immediately, she is mistaken. Because the money cannot be accessed till the time the lock-in period is over.
The amount will get transferred to a discontinued policy fund and be refunded on the completion of the lock-in period.
This fund will earn some interest (3.5 per cent) when it lies there and the total amount will be returned to the customer after deducting the discontinuation charges.
In case it is a pension or annuity plan, then only one third of the proceeds will be refunded to the investor while the rest will to used to purchase an annuity.
Discontinuation charges:
Some charges will be levied on the investor when a policy is discontinued, because the fund will incur a cost in completing the required procedure and action.
However, a limit has been set on the charges and they will not exceed a certain figure. The charges will depend on the annual premium. There are two categories here -Rs 25,000 or lower and those that are higher than this. There is a limit set on the charges to be deducted each year till the fifth year.
For example, if a person with a premium of Rs 20,000 discontinues the policy in the third year, the charges will be limited to the lower of 10 per cent of annualised premium or fund value at the time of discontinuation, subject to a limit of Rs 1,500. As the charges are not going to exceed a certain limit, the investor will know the exact cost that her action.
The good thing is that the insurance company is now barred from levying any other charges other than this and they cannot end up penalising the investor with a higher levy.
