Cap on charges from fifth year
If you have paid five annual premiums, then the insurer will not be allowed to charge you a net reduction in yield of more than four per cent. For every consequent year of premium paid, this will keep coming down further. On completing 10 years, the maximum reduction in yield will be three per cent. While all this capping is good and smoothens out the disparities among Ulips of different insurers or among multiple Ulips, it does not really bring down the burden of high charges.
Whether four or three per cent, the charge is still very high compared with mutual funds where Sebi permits a maximum investment management charge of 2.25 per cent.
Surrender charges
The capping of surrender charges is a welcome move. The maximum surrender charge, also called discontinuance charge, in the first year will be the lower of 20 per cent of the premium amount or net asset value, subject to a maximum of Rs 3,000. Every additional year will reduce the charge by 5 per cent. The capping of this charge is good, but the cap allowed is still on the higher side, considering the high incidences of misselling of Ulips. Individuals may realise their mistakes of choosing an inappropriate Ulip soon, but will be penalised heavily for wanting to rectify such a mistake.
Minimum mortality cover
All Ulips will have a minimum mortality cover (or life cover). In single premium plans, it will be 125 per cent of premium, compared with earlier norm of 50 per cent. In case of regular premium plans, minimum life cover will be 10 times the premium compared with five times earlier. It will ensure higher life cover to policyholders for the same premium paid.
Increase in lock-in period to 5 years
A five-year period does not make the insurance aspect of an Ulip any long-term in nature, contrary to Irda's belief that it does.
From an investor's perspective, a longer lock get the money back for a longer term even if one is dissatisfied with the insurer and wants to discontinue before five years. They will not get their surrender value till the five-year lockin period is over, nor will any interest accrue on the fund. Insurance agents are not expected to alert investors about the implication of this longer lock-in period and that makes the Irda move investor unfriendly.
Loan against Ulips
The maximum loan amount that can be sanctioned under a Ulip policy shall not exceed 40 per cent of the net asset value (NAV) with more than 60 per cent equity exposure and 50 per cent of NAV in case of Ulips with more than 60 per cent debt exposure. Earlier the maximum loan allowed against a Ulip was 40 per cent of the surrender value. This is no major change, except that policyholders with more debt exposure can now take higher loan due to less voltality in debt market.
Premiums to be uniform
Non-uniform premiums created complexities that investors could not fathom. A uniform premium policy will make it easier for investors to understand the investment and insurance aspect of the policies better. limited premium products will benefit investors only if agents do not try to downplay the fact that premiums in limited premium Ulips will be required to be paid for at least five years.
Charges to be distributed evenly
This is a good move, as it will prevent bunching up of expenses in the first and second years. If one discontinues a policy in a year or two, one pays for charges apportioned for that period and not the entire charge that insurers were levying till now.
4.5% returns on pension, annuity plans
A great move, as it will prevent reckless investments by insurance companies in these long-term investment products. It will ensure they have a larger dose of debt instruments in their portfolios which will act as a protection against the fluctuations in the equity component of the portfolios.
No partial withdrawal in pension plans
In the case of unit-linked pension or annuity products (pension plans), no partial withdrawal shall be allowed during the accumulation phase. Earlier, partial withdrawal was allowed after three years.
This will result in policyholders blocking the money for a longer period.
