On death, the policy pays your beneficiary the sum assured and the amount available in your investment account known as the policy account. On maturity, the policy pays the account value and terminal bonus (on maturity), if any. These will be regular premium paying policies and the sum assured will be at least 10 times the annual premium. Costs Charges will be deducted under three heads that will be mentioned explicitly in the policy brochure. The first cost head is the risk premium that deducts the cost of insurance. The second is the expense component that deducts policy administration-related charges and third is commissions that goes to the agent. While the mortality charge does not come under any cost caps just like in the case of Ulips, expenses including the commissions are capped. In the first year, the expenses are capped at 27.5% of the first year premium coming down to 7.5% in the second and third years and 5% subsequently. The new guidelines are welcome as VIPs are also distributor friendly. Despite the cost caps, VIPs are not as bad as Ulips. Investment Since it is in the traditional space, VIPs invest primarily in debt products. This is to provide for the guaranteed interest rate they declare at the beginning of every year. This interest gets credited to your premium account. The new guidelines mandate that the insurers declare a minimum floor rate, which will become the guaranteed rate of return for the entire policy term.
Additionally, in a non participating policy-that doesn't benefit from the profits that the company makes-insurers can declare an interest rate over and above the minimum floor rate. In case of participating policies-that benefit from the company's performance- a bonus will be declared at the end of every financial year. Give a minimum return of 3.5%. It is likely that most VIPs that are launched will offer the minimum return in the same range. Other features The minimum term of a VIP is five years and it comes with a lock-in of three years. Unlike a Ulip, this product does not give you the flexibility of partial withdrawals. The new guidelines specify the surrender charges. Surrender during the lock-in period will not cost anything, but the surrender value will be made available after the lock-in period of three years. Surrender during the next two years will cost you 2% and you will get back 98% of the account value immediately. There is no surrender charge applicable from the 6th year. This policy won't offer any riders. However, you can take a loan up to 60% of the value in your account. Mint Money take In the recent past, insurers that came out with VIPs have offered return rates ranging between 6% and 8% for this financial year. However, costs drag the actual yield down. The minimum floor rate, which has been around 3.5%, is hardly an incentive as you can get that even in a savings account. Looking at the costs, it is fairly exorbitant considering the minimum guaranteed rate of return is unlikely to go beyond 3.5%. It is more of a seller's product that a buyer's product.
