The new guidelines for Ulips are a mixed bag.While investors will gain from the higher insurance cover and reduced charges, it's not favourable for policyholders of pension plans
THE spat between insurance regulator Irda and equity market regulator Sebi settled in favour of the former. The government came out with an ordinance making Insurance Regulatory and Development Authority (Irda) the sole regulator of unit-linked insurance plans (Ulips). However, the victory for insurance industry and their regulator is mixed as Ulips are now governed by a new set of guidelines that may change the whole Ulip story. Ulips launching after September 1, 2010, will have lower charges, guaranteed returns and larger insurance cover.
POSITIVES
Increase in insurance cover
According to the new guidelines, insurance cover for both regular premium policy and single premium policy has increased. For those below 45 years old, the minimum death cover will be 10 times the annualised premium against five times now. For investors above 45 years of age, the cover will be 7 times the annualised premium. Also, the single premium policy cover is now based on the age of the policyholder rather than the tenure of the policy. The guidelines explicitly mention the maximum limit of health insurance cover provided by insurers. Another beneficial development is that no insurance cover (life or health) will be less than 105% of the total premiums paid by the policyholder. So investors are well insured for peril.
Cap on charges
This is one of the most vital changes that has impacted insurers hard, but has proved beneficial for investors. The cost caps that came into existence in 2009 did not stop mis-selling of plans by agents as commission were heavily loaded in the first two years of the policy. Irda has put a check on this by spreading the front-loading evenly over the first five years of the policy tenure. Also, earlier the guidelines proposed that the reduction in the yield on maturity for policies less than 10-year tenure would be 3% and for policies with tenure more than 10-year would be 2.25%. However, as an investor the cost could be still very high during the course of the policy. So if one surrenders in the 6th or 7th year, the impact on yield could be around 6-7%. The guidelines have addressed the issue by providing caps on the charges on yearly basis, while keeping the maturity caps unchanged. The cut in yield keeps decreasing till it becomes 2.25%.
Cap on surrender charges
Another significant aspect of the guidelines is the cap on surrender charges, which were 100% in the first year. However, these charges are now capped not only on percentage basis but also in absolute terms, leaving the investor to pay not more than Rs 6,000 in case the annualised premium is higher than Rs 25,000, and a maximum of Rs 3,000 in case of lower annualised premium. These charges go on decreasing as the years go by and become nil in the 5th policy year.
Loan
New guidelines have made provision for loans. The loan margins depend on the funds exposure to equity. In the case the premium is invested in the investment option (fund) with more than 60% of equity exposure, the loan granted would be 40% of the fund value. Whereas, in case premium is invested in high debt-oriented fund, the loan will increase to 50% of the fund value.
NEGATIVES
Increase in the lock-in period
In the new guidelines, the lock-in period of the fund has increased from three years to five years. So, in case the policyholder surrenders anytime before fifth year, the policy will be available to him only after the fifth year. Also the minimum premium paying term of limited premium policy has increased to five years, compelling investors to pay for long.
Sum assured on top-up
Top-up is the extra premium paid for investment purpose. Before, no sum assured was levied on this investment, it would only get invested in the fund and earn market returns like mutual fund investment. Now Irda has levied death benefit on these top-ups also. So, for instance, a 50-year-old policyholder makes a top-up of Rs 10,000 per year, his death benefit will increase by Rs 70,000. This will then be followed by an increase in the mortality charges.
Minimum guarantees
Pension policies will now have to offer minimum guaranteed of returns of 4.5% a year on maturity. Though guaranteed returns sound attractive, the percentage of the return provided is very small. Fixed-income securities, such as Public Provident Fund, National Saving certificate, provide much higher returns of 8%. In order to provide guarantee returns, insurers will hold more in debt options. Also 4.5% guarantee would mean decrease in the actual worth of fund invested, as the inflation rate is running at 11%.
Compulsory annuitisation
Irda has made insurance cover or health cover optional with pension plan, but on the other hand, annuitisation is now compulsory for all pension products. So now if one buys a pension plan, they will have to stay invested till the maturity. If the policy were surrendered within the term, then only onethird of the fund will be given as taxfree lump-sum while the rest two-third will buy an annuity, which is taxable.
These changes are a mixed bag. For policy holder of pension plans, it is not so favorable but for the rest, it is quiet a lucrative deal. Investors will gain from the high insurance cover and reduced charges.
